Changes to Itemized Deduction
Tax reform that affects both individuals and businesses wasenacted in December 2017. It’s commonly referred to as the Tax Cutsand Jobs Act, TCJA or simply tax reform. In addition to nearlydoubling standard deductions, TCJA changed several itemizeddeductions that can be claimed on Schedule A, ItemizedDeductions.
This means that many individuals who formerly itemized may nowfind it more beneficial to take the standard deduction. Taxpayersmay only do one or the other. They either take the standarddeduction or claim itemized deductions.
The tax reform law made the following changes to itemizeddeductions that can be claimed on Schedule A for 2018.
Limit on overall itemized deductions suspended.
The income-based phase-out of certain itemized deductions doesnot apply in 2018. This means that some taxpayers may be able todeduct more of their total itemized deductions if their deductionswere limited in the past because their income was above certainlevels.
Deduction for state and local income, sales and property taxesmodified.
A taxpayer’s deduction for state and local income, sales andproperty taxes is limited to a combined, total deduction. The limitis $10,000 - $5,000 if married filing separately. Anything abovethis amount is not deductible.
New dollar limit on total qualified residence loan balance.
The date a taxpayer took out their mortgage or home equity loanmay also impact the amount of interest they can deduct. If ataxpayer’s loan was originated or was treated as originating on orbefore Dec. 15, 2017, they may deduct interest on up to $1 millionin qualifying debt, or $500,000 for taxpayers who are marriedfiling separately, If the loan originated after that date, thetaxpayer may only deduct interest on up to $750,000 in qualifyingdebt, or $375,000 for taxpayers who are married filing separately.The limits apply to the combined amount of loans used to buy, buildor substantially improve the taxpayer’s main home and secondhome.
Deduction for home equity interest modified.
Interest paid on most home equity loans is not deductible unlessthe interest is paid on loan proceeds used to buy, build orsubstantially improve a main home or second home.
For example, interest on a home equity loan used to build anaddition to an existing home is typically deductible, whileinterest on the same loan used to pay personal living expenses,such as credit card debts, is not.
As under prior law, the loan must be secured by the taxpayer’s mainhome or second home (known as a qualified residence), not exceedthe cost of the home and meet other requirements.
Limit for charitable contributions modified.
The limit on the deduction for charitable contributions of cashhas increased from 50 percent to 60 percent of a taxpayer’sadjusted gross income. This means that some taxpayers who makelarge donations to charity may be able to deduct more of what theygive this year.
Deduction for casualty and theft losses modified.
A taxpayer’s net personal casualty and theft losses must now beattributable to a federally declared disaster to be deductible.
Miscellaneous itemized deductions suspended.
Previously, when a taxpayer itemized, they could deduct theamount of their miscellaneous itemized deductions that exceeded 2percent of their adjusted gross income. These expenses are nolonger deductible.
This includes unreimbursed employee expenses such as uniforms,union dues and the deduction for business-related meals,entertainment and travel. It also includes deductions for taxpreparation fees and investment expenses, such as investmentmanagement fees, safe deposit box fees and investment expenses frompass-through entities.
Create an example in which a taxpayer would benefit fromitemizing deductions instead of taking the standard deduction. Inyour example give us the taxpayer's filing status, AGI and list ofdeductions ( descriptions of the expense and theamount).
