Following the passing of the new Tax Cuts and Jobs Act (TCJA), there are several items that will affect the individual’s deductions on their return. Besides the substantial increases to the standard deductions, from $6,350 and $12,700 to $12,000 and $24,000 for single and married filing jointly taxpayers, respectively, many itemized deductions have been altered or repealed for the years 2018-2025.
Home Mortgage Interest Deduction
One change to the itemized deductions is the limitation of the mortgage interest deduction. In 2017, the deduction for interest paid was limited to acquisition debt of $1,000,000 for all mortgage balances combined ($500,000 if married filing separately). Per the act, the limit has been reduced to $750,000 ($375,000 if married filing separately) for all mortgages beginning after December 15, 2017. However, the $1,000,000 limitation will still apply to the mortgages that were placed in service before this date (grandfathered debt). When determining the amount of deductible interest, any mortgage balances considered before December 15, 2017 will decrease the $750,000 limitation. For example, if a taxpayer has a $500,000 mortgage beginning before 2017, any mortgages succeeding December 15, 2017 will be limited to $250,000 ($750,000 – $500,000).
Refinances of the grandfathered mortgages will still be eligible for the old limitation if the refinanced amount does not exceed the original balance of the loan. The inclusion of mortgages on second homes remains unaffected by the new change. Each taxpayer is permitted to include interest paid on mortgages taken out on a second residence. However, interest paid on home equity loans will no longer be deductible despite the year they were originated. As in prior years, if the mortgage interest relates to a home office used for a Schedule C business, the interest is not subject to the above limitations. Other home office
deductions have been changed and will be discussed further below.
Deduction for Taxes Paid
The deduction for taxes paid has been limited to $10,000 starting for tax years after December 31, 2017. This includes the total of all property, personal, and sales or income taxes paid. Foreign real property taxes will no longer be deductible for these tax years. Prepayments of property taxes will be deductible in the year paid if the prepaid taxes have been assessed for that specific year. For example, if the taxpayer received their 2018 property tax assessment from the county showing the first installment due in 2018 and the second installment due in 2019, the entire amount paid, subject to limitations, would be deductible on the 2018 tax return if paid by December 31, 2018. As with the mortgage interest deduction, these taxes will not be limited when related to Schedule C home offices and residential rental properties.
Miscellaneous Itemized Deductions
Another notable change to itemized deductions under the new law is the repeal of all the 2% miscellaneous itemized deductions. These include the following deductions:
- Investment fees
- Professional fees paid
- Union dues
- Safe Deposit box rentals
- Hobby expenses
This category also includes unreimbursed business expenses. Taxpayers will no longer be able to claim expenses such as continuing education, meals during business travel, or dues and subscriptions relating to their job. This subsection also contained the home office deduction for those who are not self-employed. Therefore, if the taxpayer has been working in a home office on behalf of their employer, expenses related to this will be non-deductible on their personal return going forward. Employees may consider speaking to their employer regarding this change to determine if a reimbursement plan for the use of a home office would be appropriate.
If you have any questions or concerns on how the above changes and the passing of the TCJA may affect your tax situation, please feel free to contact our office. We are happy to help mitigate these concerns and suggest tax planning solutions.