The Tax Reform Killed Off Many Itemized Deductions
Don't assume this year's taxes and tax deductions will be similar to last year's taxes. The tax reform bill which passed in December 2017 gutted most of the deductions and maimed many of the rest. Just like characters in The Walking Dead, nearly all itemized deduction were killed off by the tax reform, leaving precious few survivors.
The Maimed Survivors
Most of the most important deductions for the average family survived the 2017 tax reform bill, although many were cut back or otherwise damaged. Below are the surviving deductions which are applicable to most families.
Home Mortgage Interest Deduction
The home mortgage interest deduction is the single most important deduction to many families, as it previously was singly responsible for taking most families over the Standard Deduction threshold. The final tax code, however, offered both good news and bad news for the deduction.
There was a lot of talk (and unnecessary fear) about the death of the home mortgage deduction. While the deduction survived the tax reform, it was minorly maimed.
The home mortgage deduction is still available, but is now limited to the interest on $750k of debt. This reduction is unlikely to impact any but a small percentage of homeowners. If you live in a million dollar plus mansion, however, you are going to lose some of your deduction. While most taxpayers don't have mortgages above $750k, they may still be impacted by the changes to second mortgage interest deductibility.
Second Mortgages & HELOCs
Second mortgage interest is no longer tax deductible unless the money is used to make substantial improvements to the home. Banks hate this change because it will make it harder to sell their second mortgage products. Gone are the days when a bank convinces people to pay off their credit cards by taking out another debt and somehow feel good about it because of a tax deduction.
A "grandfather clause" does exists within the reform, so if you previously deducted second mortgage interest, you may still be able to. For mortgages and second mortgages in place before 2018, they will still enjoy the deductibility afforded under the old tax code. This means interest on up to $1 million of first mortgage and $100,000 of second mortgage debt will still be tax deductible. Many economists wish the mortgage limit was reduced further as the deduction for such large houses favors wealthier individuals who own very large houses.
State Tax Deductions
The state and local tax (SALT) deduction is a deduction which was seriously maimed. For state and local taxes, a $10,000 max aggregate limit applies to the deduction. This includes income taxes, property taxes, and other state, city, and county taxes.
The limited deduction for SALT will hit high income people the hardest, along with people in high-tax states such as California, New Jersey, and New York.
Charitable Contribution Deduction
The charitable contribution deduction actually got stronger through the tax reform, allowing for a larger deduction for cash donated to public charities. The 50% of AGI maximum contribution for deductibility is increased to 60% of AGI. This means you can deduct charitable contributions up to 60% of your Adjusted Gross Income.
Restrictions, however, are being placed on charitable contributions which look like the purchase of a product or entertainment. Seating rights, for example, are when a “contributor” donates money to a university to gain season tickets to athletic events. Effectively, the donor is just buying a sports team season ticket but was previously able to deduct 80% of the ticket price as a charitable contribution. Those type of deductions are no longer allowed.
Medical Expenses
If you had a major illness which caused massive medical expenses, the medical expense deduction was strengthened under the reform. To deduct medical expenses, the medical costs must be greater than 10% of your AGI. For 2018 (and 2017) only, the threshold was lowered to just 7.5% of AGI. For 2019 taxes (filed in 2020) and beyond the threshold returns to 10%.
The Casualties
Not all deductions survived the tax reform. In fact, nearly all itemized deductions perished in the 2017 tax reform. The following are amongst the list of casualties which are no longer tax deductible under the current tax law.
Personal Casualty Losses
In the past, a home fire, theft, or other personal casualty loss could be deducted from your taxes. Personal Casualty losses are now only deductible if loss is attributable to a federal disaster area. This means taxpayers will need to pay closer attention to when the President declares a federal disaster.
Job Expenses
Purchasing or cleaning uniforms, union dues, trainings, and other job expenses are no longer deductible under the current tax code. Job expenses related to a business, however, may still be deducted as a business expense if the business is properly established and documented.
Tax Prep & Investment Advice Fees
Much to the sadness of companies like mine; tax preparation, investment advising fees, and other financial advice are no longer tax deductible. While this is a minor inconvenience for most, this can be a major loss for high-net worth and high-income individuals with complex financial situations.
Gambling Expenses
Wagering losses are limited to wagering income, including all expenses associated with gambling. Gamblers can no longer deduct expenses and then separately calculate wagering income and losses. So a professional gambler is no longer able to use gambling deductions, such as travel expenses, to reduce taxable income from other sources. Effectively, now gambling expenses are only deductible to the extent that they offset gambling winnings.
Moving Expenses
Moving expenses are no longer deductible and there is no employee exclusion for employer-paid moving expenses. There is a special rule which still allows for deductions for members of the Armed Forces under specific circumstances.
Miscellaneous Itemized Deductions
Miscellaneous itemized deductions have been repealed including deductions for employee business expenses, and a whole host of other deductions. The list here is massive, meaning you will need to check with a tax advisor or a financial planner to determine if your previous tax deductible expenses are still allowable.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a Registered Investment Advisor and financial planning firm. He can be reached for comment at info@purposefulfinance.org