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The New Tax Law and Your Deductions

The New Tax Law and Your Deductions

| March 01, 2019

The 2018 Tax Reform is well underway this tax season and there are a lot of changes that you should know about. Although we detailed some of them in a previous post, here we will be going a little more in depth  about specific changes that may affect your taxes when filing this year. If you haven’t already checked out the first posting in this series I encourage you to read through it here. The first important change to note is that the personal deduction was doubled (single deductions went from $6,350 to $12,000 and married-joint filers increased from $12,700 to $24,000). However, this reform will only last until 2025  when, unless Congress votes to  renew the change, it will revert back to  the previous  amounts.

Many of the itemized deductions went through significant changes this year, including important changes to the medical expense deduction. In previous filing years, you could only claim a deduction for medical expenses if it exceeded 10% of your Adjusted Gross Income (AGI). Under the new tax reform, the threshold is reduced to 7.5% of AGI, though this is only for tax years 2017 and 2018.. You may also claim expenses for yourself, your spouse or your dependents if you paid them in the same year you claim them as a deduction. While this deduction cannot be claimed for cosmetic procedures and treatments, it can be claimed for procedures and treatments used for preventative care and existing problems. The 7.5% threshold is scheduled to increase but to 10% in 2019.[i]

The State and Local Taxes Deduction, also known as SALT, was also affected by the Tax Cuts and Jobs Act. This deduction used to be unlimited and covered a wide array of property, sales and income tax, though you did have to choose between deducting sales or income taxes, but not both. And while that is still true under the new ruling, there is now a cap of $10,000 of state and local taxes that may be deducted. For those that are married but are filing separately, you are only eligible for a $5,000 deduction in state, property and local taxes. This does not apply to single or head of household filers, they may still claim the full $10,000. It is also important to note that you may no longer deduct foreign real estate property taxes.[ii]

The deduction for Home Mortgage Interest, while not eliminated now has more restrictions.  Through 2017 it was possible to deduct interest on mortgage loans up to $1 million if used to acquire a first or second residence. The new Tax Cuts and Jobs Act reduces the interest deductible to the first $750,000 of a home mortgage loan. The Tax Cuts and Jobs Act also eliminates the deduction for home equity debt as of 2018 unless you can prove that the loan was taken out to buy, build, or substantially improve your residence. This deduction is also limited to interest you paid on your main home and/or second home. Interest paid on other homes is not deductible.  You must also itemize your deduction on Form 1040, Schedule A to claim mortgage interest, Schedule A also covers many other deductible expenses including; real estate property taxes, medical expenses and charitable contributions- this can sometimes add up to more than the standard deduction. If you choose to file the Schedule A form, you cannot also claim the standard deduction for your filing status.[iii]

A few deductions were completely eliminated in new tax law. If you had to move for work, unless you are active duty military, the relocation for work-related reasons is no longer deductible, along with miscellaneous itemized deductions; though some miscellaneous deductions will still apply. And unless you were involved in a Federally declared disaster you can no longer claim the deduction for casualty and theft loses. Fortunately, it covers most catastrophic events.[iv]

With so many changes to and elimination of certain deductions, it is estimated that most Americans will end up claiming the standard deduction in 2018, which should significantly simplify the tax preparation process.


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[i] IRS Tax Topic 502 – Medical and Dental Expenses
[ii] IRS Tax Topic 503 – Deductible Taxes
[iii] IRS Publication 936 – Home Mortgage Interest Deduction
[iv] IRS Publication 529 – Miscellaneous Deductions