Tax Deductions and How They Changed in 2018

The 2018 tax season is fast approaching and this will be the first tax year the Tax Cuts and Jobs Act (TCJA) is in effect. Due to the changes to deductions that came with this tax bill, many fewer taxpayers will benefit from itemizing their deductions on Schedule A in 2018, instead preferring to take the newly-increased standard deduction.

What are the itemized and standard deductions?
Each year taxpayers receive a certain amount of income that is not taxed. It is not taxed because it is deducted from one's gross income to calculate a taxable income amount, on which taxes are then assessed. The amount that gets deducted can be figured in one of two ways.

1. Standard deduction: Deduct a specific amount based on your filing status - singles (and married filing separately) deduct $12,000, heads of household (single w/dependent children) deduct $18,000, married filing jointly deduct $24,000.
2. Itemized deductions: Add up the amount of all deductible expenses - most commonly these include: state income (or sales) tax, property taxes, mortgage interest, and charitable giving. As of 2018, only $10,000 of state taxes and property taxes may be deducted!

What happened to personal exemptions?
They're gone. This was a big change for 2018. In 2017 a single taxpayer got a standard deduction of only $6350 but had their taxable income additionally reduced by a personal exemption of $4050 for a total taxable income reduction of $10,400. This was replaced in the TCJA by a larger standard deduction. The personal exemptions one used to claim for dependent children was replaced with an increase to the child tax credit.

                                                           Single                                Married
                                                 2017    vs    2018                2017   vs    2018  
Personal Exemption(s)          $4050    vs       -                $8,100   vs      -
Standard Deduction              $6350    vs    $12000        $12700   vs  $24000
Total Tax-Exempt Income  $10400  vs   $12000       $20800 vs  $24000

What else changed?
A large part of the TCJA's attempt at simplifying the tax code was to do away with certain "miscellaneous itemized deductions" that could only be deducted for the amount that exceeded 2% of your AGI. These prompted tax preparation software to ask lots of questions, but in most cases the information didn't translate into any reduction in tax liability. Some of these items that are no longer deductible in any part are:

• Unreimbursed employer expenses
• Expenses related to investments and production of taxable income
• Professional license fees
• Tax related, preparation and advice expenses
• Hobby-related expenses
• Check out this article for a comprehensive list 

What about my student loan interest and traditional IRA?​
Student loan interest and traditional IRA contributions reduce your taxable income but are not itemized deductions. If otherwise eligible, you will benefit from these adjustments even if you take the standard deduction.

So how do I know if I want to take the standard deduction or itemize deductions?
Take whichever one is bigger! Prior to 2017, when the standard deduction was smaller and state taxes and property taxes were fully deductible, many homeowners and most high earners in states with income tax benefited from itemizing their deductions. As noted above, as of 2018 the itemized deduction for all state and local taxes (SALT) is capped at $10,000 whether you're single or married filing jointly. (Married filing separately? The SALT deduction is capped at $5000.)

• Liam is single. He pays $5000 of state income tax, $4000 of property taxes, and $8000 of mortgage interest. His SALT of $9000 is fully deductible, and after adding in his mortgage interest, his total itemized deductions are $17,000. Compare to a standard deduction of $12,000 - Liam should itemize his deductions!
• Marissa and Dale are married. They pay $6000 and $4000 of state income tax respectively. They also pay $5000 of property tax and $12,000 of mortgage interest. Despite paying $15,000 of SALT, only $10,000 is deductible. With mortgage interest, their total itemized deductions are $22,000. Compare to a standard deduction of $24,000 - Marissa and Dale should take the standard deduction!

If it were still 2017, Marissa and Dale would have had $27,000 of itemized deductions and a standard deduction of $12,700 making itemizing clearly advantageous. In 2018 many taxpayer who have been itemizing for years will find themselves taking the standard deduction. Check out the calculator below to see how your deductions stack up in 2018!

One last thing - charitable giving
You may have noticed that by having a higher threshold to benefit from itemizing, one may not realize the same tax benefit for charitable giving as in prior years. If you do a lot of charitable giving, it may be more effective to “bunch” this giving. I’ll talk more about that in my next blog post. Stay tuned!

TCJA Standard vs Itemized Deductions Calculator
This calculator compares your itemized deduction to your standard deduction, accounting for the most common itemized deductions.