By Vincenzo Villamena, CPA
With the tax season under way many people are confused about the 2018 tax deductions changes. The Tax Cuts and Jobs Act signed in December 2017 made a number of changes to deductions. While increasing the standard deduction substantially, the law eliminated or limited many other popular deductions.
11 tax deduction changes for 2018:
1. Increased new standard deduction
Notably, the new standard deduction nearly doubled. At now $12,000 it is higher than the old standard deduction of $6,350 and personal exemption of $4,050 combined ($10,400),
2. Personal exemption eliminated
With the increase of the standard deduction, personal exemptions were eliminated entirely. Families with children may see a negative impact from this. If you have more kids, you won’t get more exemptions.
3. Moving expenses deduction eliminated
The tax reform completely eliminated the deduction of moving expenses. This may affect expats that are leaving from or returning to the US, or move between locations for work, and don’t have all moving expenses reimbursed by an employer.
4. Miscellaneous deductions subject to the 2% rule eliminated
These eliminated miscellaneous deductions include un-reimbursed employee expenses and tax preparation expenses, home office expenses, licensing and regulatory fees, union dues, professional society dues, business bad debts, work clothes that are not suitable for everyday use, investment advisory fees and other investment related fees, credit card convenience fees, IRA account fees. All those deductions that were subject to the two percent AGI rule are no longer allowed.
This change affects employees. Self-employed people can still deduct business-related expenses.
5. Mortgage interest deduction capped
Previously, a taxpayer could deduct interest on the first $1,000,000 of a mortgage. The bill lowered this limit to $750,000.
Interest on a home equity loan is not deductible at all for the tax years 2018 through 2025.
6. State and local taxes capped
The biggest change to deductions affects state and local taxes, which are now limited to $10,000. This means that the amount that you can deduct for all state and local sales, income, and property taxes together cannot exceed $10,000. This really affects a lot of taxpayers in high tax states like New York and California, since it severely limits the amount they can deduct.
This cap applies to Schedule A deductions for individuals. If you run a business or trade and pay state, local, and foreign property taxes, or state and local sales taxes as part of a business or trade, you can still deduct those on Schedule C, Schedule E, or Schedule F without a limit. So if you hold rental property for the production of income, the taxes remain deductible.
7. Medical and dental expenses threshold lowered
Prior to 2018, taxpayers could deduct medical and dental expenses that exceeded 10% of their Adjusted Gross Income (AGI) when itemizing. For the tax years 2017 and 2018 only the tax law lowered that threshold to 7.5%. However, with the higher standard deduction available in 2018, most taxpayers, especially expats, won’t itemize.
8. Charitable contributions limit increased
The charitable contribution deduction limit increased from 50% of Adjusted Gross Income to 60%.
9. Itemized deductions phase-out eliminated
Starting in the 2018 tax year higher income taxpayers no longer face a limitation on itemized deductions.
The new tax law changed the tax treatment of alimony. The alimony payer can no longer deduct the spousal support payment, and the recipient no longer has to pay taxes on it. This change applies to divorce agreements that are signed after December 31, 2018. It does not affect existing agreements.
11. Healthcare mandate still in effect for 2018, eliminated beginning in 2019
The Affordable Care Act penalty for failure to purchase mandatory health insurance is abolished starting 2019. That means that for 2018 taxpayers still require other health coverage if living in the US to avoid the penalty. Expats living in a foreign country for at least 330 days of a 12-month period don’t need health insurance coverage for that 12-month period.
Besides the changes to the 2018 tax deductions, the new tax law brought a myriad of other changes, especially for businesses. For example the new 20% pass-through deduction may benefit some businesses owners.
If you need help with your tax return preparation or to optimize your business tax situation under the new tax law, schedule a free consultation.