Most individual taxpayers are allowed to deduct either the standard deduction or their total itemized deductions. For tax years before 2018, itemized deductions have included such things as medical expenses, state and local income taxes, real estate taxes, mortgage interest, charitable contributions, investment expenses, and unreimbursed employee expenses, among others. Below is a summary the changes to itemized deductions that start in tax year 2018.
Medical expenses. Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income (AGI) for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers and it returns to this level in 2019.
State and local taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 (or $5,000 for a married taxpayer filing a separate return). We will cover more about the implications of the changes to the deduction for state and local taxes next week.
Mortgage interest. Mortgage interest on loans used to acquire a principal residence or a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. There is a grandfather clause for mortgages (not home equity loans) taken out before December 16, 2017, and the higher limits continue to apply to that debt. Additionally, a deduction for interest on home equity loans is not allowed when the funds are not used to improve your home or for a qualified business use. We will cover more about the changes to the deductibility of mortgage interest in the coming weeks.
Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions, which were formerly deductible to the extent they exceeded 2% of AGI. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses. We will cover more about the changes to unreimbursed employee expenses in the coming weeks.
Overall limitation on itemized deductions. The new law no longer has an overall limitation on itemized deductions that formerly applied to taxpayers whose AGI exceeded specified thresholds. The so called “Pease limitation” limited itemized deductions by 3% of the amount by which AGI exceeded the applicable threshold ($313,800 for married filing jointly and $261,500 for singles). The reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
As we discussed last week, the TCJA nearly doubles the standard deduction for all filers. Due to the increase to the standard deduction and the reduction of some of the itemized deductions listed above, many taxpayers who previously used itemized deductions will now use the standard deduction because the standard deduction will be higher than their itemized deductions.