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Friday, March 29, 2024

ITEMIZERS BEWARE: A few things to know about changes to Itemized Deductions.

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The upcoming filing season will be the first season that taxpayers file their taxes under the new tax reform. 

Tax changes happen every year but the Tax Cuts and Jobs Act of 2017 (TCJA) was the first tax reform in three generations. As 2018 comes to an end, the IRS is still in a frenzy trying to complete new guidelines, forms and instructions in time for the upcoming tax season. But the IRS aren’t the only ones who should be concerned with being prepared for tax time because many taxpayers will see a difference in their tax return this year.  

Under the new TCJA, key changes were made including changes to the Standard deduction and Itemized deductions. Historically, around 70 percent of US taxpayers generally use the standard deduction to reduce the amount of income on which they will be taxed on and approximately 30 percent choose to use an itemized deduction if it reduces their income by a larger amount. Beginning this year, The TCJA nearly doubles the standard deduction amount and eliminated or modified Itemized Deductions. As a result many taxpayers, who previously itemized, may find it more beneficial to file using the standard deduction on their 2018 taxes. Before you decide, there are a few things you should know about changes to Itemized Deductions.

 

Medical Expense Deduction is still increased for the 2018 tax year.

Previous to tax changes, taxpayers were able to deduct medical expenses over 10 percent of annual gross income. But for the 2018 tax year, a larger medical expense deduction is available. For 2018 taxpayers may deduct medical expenses over 7.5 percent of their AGI versus the normal 10 percent. This means that a taxpayer who earns $10,000 and paid medical expenses of $1,700 would normally receive a deduction of $700 (medical expenses over 10 percent of AGI), but because of the temporary increase of this deduction that same taxpayer may deduct $750 (medical expenses paid over 7.5 percent of AGI). This is also retroactive to 2017 but is only temporary and will increase back to a 10 percent in 2019.

 

There’s a cap on Home Mortgage Interest.

Before this year, a taxpayer could write off up to $1 million in home mortgage debt and up to $100,000 on interest paid on home equity loans. After the Tax Cuts and Jobs Act enactment, this is no longer the same. For 2018 taxpayers will be able to claim the $1 million dollar deduction for loans originated before Dec. 15, 2017. Loans originating after that can be deducted at a combined amount of up to $750,000 for qualified residence loans and home equity loans used to buy, build or substantially improve your main residence and second home.  Home equity loans can only qualify for the deduction if the loan is used to buy, build or substantially improve your main home or second dwelling.  

 

Limits for the Charitable Contributions deductions have increased. 

Under the old tax code, charitable contributions such as cash donations and property were limited to 50 percent of adjusted gross income. After the TCJA changes took affect, taxpayers can now deduct contributions up to 60 percent. This means that if you had an adjusted gross income of $50,000 before 2018 your deductions would have been limited to $25,000 at 50 percent but in 2018 or after, the deduction can be up to 60 percent and a $30,000 would be claimed. 

 

The Casualty Loss Deduction isn’t the same. 

Taxpayers have traditionally been able to claim an itemized deduction for property losses. So if there was a fire, burglary or vandalism, they were deductible if not reimbursed by insurance. But now taxpayers may only claim a Casualty Loss if it’s caused by a disaster in a federally declared disaster area. The loss must exceed $100 per casualty and exceed 10 percent of AGI.

 

State and Local Taxes were capped. 

Under the TCJA, State and Local Income Tax (SALT) Deductions for property, sales or income tax are capped at $10,000. In the state of Indiana the average deduction is under the capped amount so if you still itemize you may not lose any of your deduction but if you normally claim more, you won’t be able to catch the same tax break this year. 

 

Miscellaneous Itemized Deductions Eliminated

Taxpayers have generally claimed various miscellaneous deductions for certain expenses. Safe deposit box fees, unreimbursed employee expenses such as uniforms, business related meals, union dues and the deduction for entertainment and travel were deductible, as well as deductions for tax preparation fees and investment expenses. For the 2018 tax year, these itemized deductions are no more and as a result, they can no longer be claimed. 

Changes to Itemized deductions are expected to affect almost every taxpayer who itemizes. Though recordkeeping is very important, saving all your receipts this year may not be as useful as before. If you were considering itemizing again this year or have questions as to how this affects your tax situation, be sure to ask your tax professional. Becoming familiar with the IRS website and seeking professional help early can help you get the best tax savings this year. 

The new IRS Publication 5307 Tax Reform: Basics for Individuals and families is now available as a resource on irs.gov and for more information on tax reform changes you can also visit IRS.gov/tax-reform.

 

Brittany Sabalza, enrolled agent, is director of continuing education for Pro Tax Solutions Indianapolis and a tax columnist.

 

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