The Tax Cuts and Jobs Act of 2017 made several significant changes to the way individuals and businesses will file their taxes in the years to come.
This tax season, as taxpayers are preparing to file their 2018 returns, the impact of the new law is sure to be felt.
According to the Tax Foundation, a non-profit group which advocates for a simpler tax code, the Tax Cuts and Jobs Act (TCJA) eliminates the need for millions of households to itemize their deductions.
How does the law accomplish this feat? It nearly doubles the standard deduction (from $6,500 to $12,000 for individuals), lowers individual taxes for households across multiple income brackets, and provides higher tax credits for families with children.
The Internal Revenue Service estimates that the average time needed for a staff member to complete an individual tax return will drop by four to seven percent thanks to the new changes. This could save between $3.1 billion to $5.4 billion per year in compliance costs.
As a trade off for a simpler process, savings, and other benefits, the new tax law wiped out several deductions that millions of taxpayers have claimed in previous years.
Beginning this tax filing season, here are some of the deductions that disappeared or have been changed.
*Note: Some of these provisions expire after 2025, unless Congress takes further action.
Taxpayers may no longer claim the personal exemption which reduced everyone’s taxable income by $4,050 last year.
For most people, the nearly doubled standard deduction makes up for the loss of personal exemptions. Yet for some, notably those families with dependent children, the higher standard deduction might not make up for the elimination of personal exemptions. However, new higher child tax credits may help to offset any losses in this area.
Casualty losses and theft
Many taxpayers will no longer be allowed to deduct losses from natural disasters, fires, robberies, and other former qualifying circumstances. Moving forward, the president must declare an area to be a natural disaster before a loss can be claimed.
Home equity loan interest
As of 2018, interest paid on home equity loans (and home equity lines of credit) will no longer be deductible for some borrowers. Moving forward, interest will only be deductible if the home equity loan was used to build, buy, or improve a taxpayer’s home.
Active duty military members and their families may still deduct moving expenses on their 2018 tax return and in years to come. For non-military tax payers, however, moving expenses are no longer deductible, even if the relocation is a job-related move.
New cap on state and local taxes
In previous years, taxpayers enjoyed unlimited deductions for state and local taxes paid. These so-called SALT deductions have been capped at $10,000 beginning with the 2018 tax year.
For many taxpayers, this change will not be noticed. Yet tax payers in states with above-average tax rates (like California and New York) and those who own multiple properties may feel the sting of this newly imposed restriction.
New cap on mortgage interest
Prior to the new tax law, home owners could deduct the interest paid on a mortgage of up to $1 million. Tax payers preparing to file their 2018 returns may experience a change.
Moving forward, only interest fees paid on mortgages of $750,000 or less will be deductible. (Taxpayers can still deduct interest on mortgages up to $1 million if the home was purchased before December 15, 2017.)
Unreimbursed employee expenses
Previously, employees who covered job-related expenses out of their own pockets could deduct those costs from their taxable income — provided that the fees were not reimbursed and exceeded their adjusted gross income by 2% or more.
As of the 2018 tax year, these deductions will no longer be allowed.
Donations to colleges (in exchange for the right to purchase tickets)
Certain colleges and universities offer alumni the chance to purchase season tickets to college events. In exchange for the right to purchase, a donation to the school is usually required.
This type of donation is no longer tax deductible under the new law.
For post-2018 divorce agreements, alimony deductions have been eliminated.
Divorce agreements executed before 2019, however, have been grandfathered and may still be claimed, provided the alimony agreement can satisfy IRS requirements.
Parking and transit reimbursements
This particular deduction rollback affects employers more than employees. Beginning in 2018, employers may no longer deduct parking and transit reimbursement fees provided to their employees.
In previous years, up to $255 per month, per worker was eligible for deduction. Although this deduction is being revoked from employers, workers may feel the impact too as some employers are bound to eliminate these reimbursements from their benefits packages.
Should you itemize?
The passage of the Tax Cuts and Jobs Act will no doubt result in fewer itemized tax returns in the United States, beginning this tax filing season. Yet the question of whether you should itemize remains a personal one which only you can answer for yourself.
The new standard deduction is $12,000 for individuals and $24,000 for married couples filing jointly. If you believe your itemized deductions will exceed that amount, then it still probably makes sense to fill out an itemized tax return.
On the other hand, if the standard deduction is higher than the deductions you could receive by itemizing, taking the standard deduction may save you both time and money.
Unsure which option is best for you? It may be a good idea to consult with a certified tax professional. Together, you can come up with a tax filing strategy which works best for you under the new law.