New Tax Act and Additional Itemized Deduction Implications

Individual taxpayers should be aware of major changes that will be implemented this year for their 2018 return. Even though it seems still like a long time to April 2019, it is necessary to have some impression about the new Tax Act and how it might affect you. Due to changes in the tax brackets, itemized deductions, and personal exemptions, etc this is one of the most significant changes in the tax rules since 1986.

The new Tax Act imposed different limitations on itemized deductions. Prior to the Act, the total amount of otherwise allowable itemized deductions (other than medical expenses, investment interest) was limited only for upper-income taxpayers. The limitation reduced the otherwise itemized deductions by 3% of adjusted gross income (AGI) if AGI exceeded a certain threshold amount. This limitation did not reduce itemized deductions by more than 80%. On the other hand, the new Tax Act repeals the overall limitation on itemized deductions for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, but at the same time limits which expenses can be claimed as an itemized deduction (see below for details).

The second big difference in the new tax law versus the old tax law is the mortgage interest deduction. Prior to the new Act, a taxpayer could deduct mortgage interest paid with respect to a principal residence and one other residence of the taxpayer. The interest payments up to $1 million in acquisition indebtedness and up to $100,000 in home equity indebtedness could be taken as a deduction. The new Tax Act reduces the $1 million acquisition indebtedness to $750,000 for debt incurred after Dec. 15, 2017. The limitation of $1 million remains the same amount for prior  debts, so that is helpful. For tax year beginning after Dec. 31, 2025, the limitation reverts to $1,000,000 regardless the date of the debt’s occurrence.

In the past, individuals could deduct state and local income and property taxes paid. For states without income taxes (for example: Florida), they can claim a deduction for state and local sales tax, so they get some deduction benefit. The 2017 Reform Act allows individual taxpayers to deduct state and local sales, income or property tax up to $10,000 ($5,000 for married but filed separately). For amounts paid in tax year beginning before Jan 1, 2018, with respect to State or local income taxes, this payment will be treated as paid on the last day of the tax year that such tax is imposed. Therefore, taxpayers in high tax states like New York who make a lot of money will see their itemized deductions plummet.

Another change that was imposed was for charitable contributions. For tax periods that begin before 2018 and after 2025, the limitation for cash contributions made to public charities, private operating foundations and private distribution charities was 50% of AGI. The deduction for cash contribution to private nonoperating foundations was limited to 30% of AGI. For contributions that are made to an educational institution’s athletic events exchange for a contribution to educational institution is permitted to deduct 80% of amounts contributed. The Reform Act increased the cash contribution limitation from 50% to 60%. It also suspends the 80% deduction for contributions made for university athletic seating rights.

By: Timothy S. Hart

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