The Impact of Tax Reform on Deductions

In previous years, December was a crucial time to make last-minute changes to your tax situation, especially by maximizing itemized deductions as part of your Deduction Planning strategy. Common approaches included pulling forward medical expenses, prepaying property taxes, or making charitable contributions. However, in 2018, the Tax Cuts and Jobs Act (TCJA) changed the landscape for many taxpayers. The IRS estimates that there will be a 60% reduction in individuals who will itemize their deductions. With the TCJA, the standard deduction has increased significantly—$12,000 for single filers and $24,000 for married filers. Additionally, if you’re 65 or older, you can increase your deduction by $1,600 (single or head of household) or $1,300 (for married filers). If both spouses are 65 or older, the deduction increases by $2,600. This, along with the elimination of several other deductions, means that it may not be worth trying to increase your deductions under the new tax law.

Key Tax Law Changes and Their Impact

For many, understanding the changes to deductions is crucial. The TCJA changes how you can deduct medical expenses—now subject to a 10% of AGI floor, up from 7.5%. For example, if your AGI is $150,000 and your medical expenses total $16,500, you could have deducted $5,250 in 2018, but under the new rules, you can only deduct $1,500. Effective Deduction Planning will require taking these updated thresholds into account.

State and local tax deductions are capped at $10,000, meaning even if you paid more in taxes, the total you can deduct is still limited to $10,000. If you have a mortgage, the TCJA limits the mortgage interest deduction to $750,000 of home debt. Home equity loans used to consolidate other debt are no longer deductible, but loans used to improve your home remain eligible.

Charitable Contributions and Other Considerations

On a brighter note, charitable contributions have become more advantageous, with the 50% AGI limitation raised to 60%, and you can now carry forward deductions at the new rate.

For many taxpayers, the key question remains whether it’s worth it to itemize or take the standard deduction. With fewer people able to itemize due to the higher standard deduction, charitable contributions are becoming a way to supplement your deductions. Larger, less frequent donations may be a better strategy than giving annually if you’re looking to maximize your Deduction Planning and overall tax benefit.

Other notable changes include:

• The repeal of the Pease limitation

• Advisory fees are no longer deductible

• Moving expenses are no longer deductible

• Tax brackets have changed

• Kiddie taxes will be taxed at trust rates

• Recharacterization of Roth contributions is no longer allowed

• 529 plans can now be used for private school expenses

• AMT exemptions have expanded

The most significant change, however, is the elimination of personal exemptions. While in 2017, you could claim an exemption of $4,050 per person, that benefit is no longer available. However, the child tax credit has increased to $2,000 per child under the age of 17, with the phase-out range now much higher—$400,000 for married couples.

As always, be sure to consult with a tax professional to discuss how these changes specifically impact your tax situation before making any decisions.

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