Question

Changes to Itemized Deduction

Tax reform that affects both individuals and businesses was enacted in December 2017. It’s commonly referred to as the Tax Cuts and Jobs Act, TCJA or simply tax reform. In addition to nearly doubling standard deductions, TCJA changed several itemized deductions that can be claimed on Schedule A, Itemized Deductions.

This means that many individuals who formerly itemized may now find it more beneficial to take the standard deduction. Taxpayers may only do one or the other. They either take the standard deduction or claim itemized deductions.

The tax reform law made the following changes to itemized deductions that can be claimed on Schedule A for 2018.

Limit on overall itemized deductions suspended.

The income-based phase-out of certain itemized deductions does not apply in 2018. This means that some taxpayers may be able to deduct more of their total itemized deductions if their deductions were limited in the past because their income was above certain levels.

Deduction for state and local income, sales and property taxes modified.

A taxpayer’s deduction for state and local income, sales and property taxes is limited to a combined, total deduction. The limit is $10,000 - $5,000 if married filing separately. Anything above this amount is not deductible.

New dollar limit on total qualified residence loan balance.

The date a taxpayer took out their mortgage or home equity loan may also impact the amount of interest they can deduct. If a taxpayer’s loan was originated or was treated as originating on or before Dec. 15, 2017, they may deduct interest on up to $1 million in qualifying debt, or $500,000 for taxpayers who are married filing separately, If the loan originated after that date, the taxpayer may only deduct interest on up to $750,000 in qualifying debt, or $375,000 for taxpayers who are married filing separately. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

Deduction for home equity interest modified.

Interest paid on most home equity loans is not deductible unless the interest is paid on loan proceeds used to buy, build or substantially improve a main home or second home.

For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest 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 main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

Limit for charitable contributions modified.

The limit on the deduction for charitable contributions of cash has increased from 50 percent to 60 percent of a taxpayer’s adjusted gross income. This means that some taxpayers who make large donations to charity may be able to deduct more of what they give this year.

Deduction for casualty and theft losses modified.

A taxpayer’s net personal casualty and theft losses must now be attributable to a federally declared disaster to be deductible.

Miscellaneous itemized deductions suspended.

Previously, when a taxpayer itemized, they could deduct the amount of their miscellaneous itemized deductions that exceeded 2 percent of their adjusted gross income. These expenses are no longer 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 tax preparation fees and investment expenses, such as investment management fees, safe deposit box fees and investment expenses from pass-through entities.

Create an example in which a taxpayer would benefit from itemizing deductions instead of taking the standard deduction. In your example give us the taxpayer's filing status, AGI and list of deductions ( descriptions of the expense and the amount).

Answer 1

The standard deduction is a fixed dollar amount that reduces the income you’re taxed on. Your standard deduction varies according to your filing status.

Itemized deductions also reduce your adjusted gross income (AGI). Example: If you’re single and your AGI is $40,000 with itemized deductions of $14,000 your taxable income would be $26,000. If you elected to use the standard deduction you would only reduce AGI by $12,200 making taxable income $27,800.

You might benefit from itemizing your deductions on Form 1040 if you:

• Have itemized deductions that total more than the standard deduction you would receive (like in the example above)
• Had large, out-of-pocket medical and dental expenses
• Paid mortgage interest and real estate taxes on your home
• Had large, uninsured casualty (fire, flood, wind) or theft losses
• Made large contributions to qualified charities
• Had large, unreimbursed miscellaneous expenses

  Standard deduction vs. Itemized deductions – state tax considerations

  There’s one situation where you may want to itemize deductions even if your total itemized deductions are less than your standard deduction. You might want to do this if you’d pay less tax overall between your federal and state taxes. This can happen if you itemize on your federal and state returns and get a larger tax benefit than you would if you claimed the standard deduction on your federal and state returns. Note that some states do not allow itemized deductions, such as Michigan or Massachusetts.