Schedule A Itemized Deductions

Major Changes Under the Tax Cuts and Jobs Act

Austin Bradley, CPA

Though tax reform was passed well over a year and a half ago, it’s still a hot topic on many people’s minds. Whether you’re happy with the results often depends on your specific tax situation, and itemized deductions are no exception. Here’s a refresher on the changes to itemized deductions, how they impact you and if there’s anything you can do to save a few tax dollars.

Standard deduction

Changes to the standard deduction will impact a very large number of taxpayers. Tax reform nearly doubled the standard deduction, meaning many taxpayers will no longer itemize their deductions. This is a rare case of tax law changes simplifying the filing process for many taxpayers, as those taxpayers whose itemized deductions do not exceed the standard deduction will no longer need to hunt down their mortgage interest, real estate taxes, charitable donations, and medical expenses.

Don’t miss: The tax impact of having a family

This can be a double-edged sword, however. For example, if you typically make charitable donations each year, you may no longer receive the same tax benefits that you are accustomed to. The bottom line is if you don’t itemize, your donations are not helping to drive down your tax bill. In this situation, you could choose to implement a strategy called “charitable bunching.” For example – maybe you donate $5,000 to your favorite charity every December. Instead, you could donate $25,000 every five years in order to “bunch” your charitable donations into one tax year and thus receive a tax benefit.

As a reminder, the standard deduction amounts for 2019 are listed below. If the sum of all your itemized deductions do not exceed your applicable standard deduction, then it is not advantageous to file a Schedule A.

Filing status Standard deduction
Individual $12,200
Married filing jointly $24,400
Married filing separately $12,200
Head of household $18,350

State and local income and real estate taxes

The change to the deduction for state and local taxes is probably the most drastic change to Schedule A, and is one that many taxpayers are not happy with. Under the old tax law, you could deduct all state and local income and property taxes paid during the year as an itemized deduction. Under the law, this deduction is capped at $10,000 total. This is exceptionally hard-hitting for taxpayers living in high income tax and property tax states, such as New Jersey and California. For taxpayers considering the purchase of any expensive “toys”, such as vacation homes, boats, etc., with the expectation of deducting their property taxes on these items, you will want to take the new tax law into account when making your decision. It may not be a reason to forego your dream house on the beach, but it’s important to consider the tax consequences of any large financial transaction.

Mortgage interest

Under the previous tax law, taxpayers could deduct interest paid on a home mortgage up to $1 million of mortgage principal. Tax reform reduced this cap to $750,000. The good news is, if you secured your mortgage prior to December 15, 2017, you are grandfathered in under the old $1 million limit. Regardless of which limit you fall under, the cap is based on total mortgage principal of your first and, if applicable, second residences. For taxpayers with three or more homes, any interest paid on the third residence and above is not deductible.

Home equity loan interest

Prior to the most recent tax reform act, interest paid on home equity loans (up to $100,000 of principal balance) was tax deductible regardless of what the proceeds were used for. This is one of the reasons many homeowners used their residence like an ATM during the real estate boom of the early 2000’s. Under the new tax law, home equity interest is subject to what is known as “interest-tracing rules”, meaning that it is only deductible if the proceeds are used to improve your primary residence, or used for investment purposes such as starting a business or purchasing a rental property. Gone are the days of taking equity out of your home to go on a vacation or buy a jet-ski, while writing off the interest along the way.

There are other important items to note regarding home equity loans as well. As we discussed earlier, the new mortgage deductibility cap is $750,000. Home equity loans are applied against this cap as well. For example, if the mortgage balance on your principal residence is $500,000, you would have $250,000 of potential room for a deductible home equity loan. Whereas if your mortgage is already at or above the $750,000 cap, your home equity interest would not be deductible regardless of how the proceeds are used. Additionally, taxpayers need to remember that home equity loans existing prior to December 15, 2017 are NOT grandfathered in under the old rules. So if you drew on a HELOC prior to that date, those proceeds will be subject to the interest tracing rules that we discussed earlier.

Medical expenses

In 2019, your medical expenses are deductible only to the extent they exceed 10% of your adjusted gross income (AGI). In previous years, this limitation was applied at 7.5% of your AGI. Most taxpayers will not see a benefit on their Federal income tax return due to the high AGI threshold, and that goes for both the new and old tax laws. However, some states allow a deduction for medical expenses with no AGI limitation, so it may still be worth keeping track.

As you may have noticed, most of these new provisions are not “taxpayer friendly.” Fortunately, there are still opportunities for planning to help maximize your deductions and minimize your tax bill. Everyone’s individual tax situation is different, and there is no one-size fits all solution. For information about changes to your specific tax situation, talk with your trusted tax professional about strategies to optimize your overall financial picture.

 

Austin Bradley, CPA, Manager, specializes in providing tax preparation services for partnerships and S corporations. You can reach Austin at AustinB@hhcpa.com or (480) 483-1170.