Opportunities vanishing after 2017 returns
The new tax law enacted at the end of last year—the Tax Cuts and Jobs Act (TCJA)—provides numerous tax changes for individuals, including tax rate cuts and a higher standard deduction. Significantly, the TCJA also eliminates or modifies certain deductions, including the majority of itemized deductions, beginning in 2018. As a result, fewer taxpayers are expected to itemize returns in the future.
However, these deductions are still available on the 2017 returns being filed in 2018, based on prior law. The following is a brief summary.
State and local taxes (SALT): For 2017, you can deduct your (1) state and local property taxes and (2) state and local income taxes or state and local sales taxes. Beginning in 2018, the SALT deduction is limited to $10,000 annually for any combination of the two.
Mortgage interest: Generally, you are able to deduct interest paid on the first $1 million of acquisition debt and $100,000 of home equity debt. For loans that were made after December 15, 2017, the acquisition debt level is reduced to $750,000, and the home equity debt deduction is repealed after 2017.
Casualty and theft losses: Under pre-TCJA law, losses are limited to the excess above 10% of adjusted gross income (AGI), after subtracting $100 per event. After 2017, this deduction is eliminated, except for disaster-area losses.
Miscellaneous expenses: On 2017 returns, taxpayers can deduct miscellaneous expenses, including unreimbursed employee business expenses, to the extent the annual total exceeds 2% of AGI. Beginning in 2018, this deduction has been eliminated.
Moving expenses: Prior to 2018, you could claim qualified job-related moving expenses as an above-the-line deduction. This deduction, available on 2017 returns, has been repealed by the new tax law, except for expenses incurred by active-duty military personnel.
Domestic production activities: Under Section 199 of the tax code, an above-the-line deduction is allowed in 2017 for qualified domestic production activity expenses. This Section 199 deduction, which is often claimed by manufacturing operations, is no longer available after 2017.
Alimony deductions: For 2017, payers of alimony may deduct the payments, while the income is taxable to the recipients. The TCJA repeals this above-the-line deduction, eliminating the tax consequences for recipients, for divorce or separation agreements entered into after 2018. (Thus, this deduction is essentially extended for one more year.)
Note that the TCJA retains itemized deductions for charitable donations, gambling losses and medical expenses. In fact, the medical deduction threshold is lowered to 7.5% of AGI for 2017 and 2018 (see “Favorable Tax Treatment for Medical Expenses”). In addition, the new law preserves above-the-line deductions for student loan interest, IRA contributions and educator expenses, to name a few.
The TCJA changes for individual taxpayers are generally scheduled to sunset after 2025, but that is a long way off. Practically speaking, this may be the last year you are entitled to claim certain deductions in full or at all. Consult your tax adviser to maximize the tax benefits.