Most individuals have recently completed their income tax returns for 2017. Now is the time to focus attention on 2018 and beyond. As you do so, you’ll find that as a result of the Tax Cuts and Jobs Act, many write-offs that have long been available to individuals are now missing from 2018 returns. The changes in deduction rules may influence income tax withholding and estimated tax payments for 2018 and beyond. Here is a roundup of deductions that have been deleted, some temporarily (from 2018 through 2025) and some permanently.
Personal and Dependency Exemptions
In 2017, you were able to deduct $4,050 for yourself and each dependent. For example, a married couple with two dependent children could subtract $16,200 ($4,050 x 4) in arriving at taxable income.
In 2018 through 2025, you cannot deduct personal and dependency exemptions. However, the concept of a dependent remains important for other tax purposes, such as the earned income credit and the newly-expanded child tax credit.
Until now, if you relocated for a job or a business opportunity (self-employment) and met certain tests, you could deduct the cost of moving your household as an adjustment to gross income (no itemizing required). If you were reimbursed for your moving costs by your employer, the reimbursement was a tax-free fringe benefit.
Starting in 2018, you can no longer deduct the costs to move your household. What’s more, if an employer reimburses you for moving expenses, this is now a taxable fringe benefit (through 2025). The only exception is for a member of the Armed Forces on active duty moving pursuant to a military order and incident to a permanent change of station.
Home Mortgage Interest
Until now you could deduct interest on up to $1 million of acquisition indebtedness (a loan to buy, build, or substantially improve a principal residence or second home where the debt was secured by the mortgage). And you could deduct up to $500,000 in home equity debt, regardless of how you used the proceeds. These limits were halved for married persons filing separately.
Starting in 2018, the dollar limit on acquisition debt drops to $750,000 ($375,000 for a married person filing separately) for debt incurred after Dec. 15, 2017.
Also starting in 2018, interest on a home equity loan generally is not deductible. This is so regardless of when the loan was taken out. The IRS has made it clear (IR-2018-32, 2/21/18) that if you use the proceeds as acquisition indebtedness, the interest is deductible (subject to the overall dollar limit on qualified residence loan balances). For example, if you take out a home equity loan secured by your residence to add a room, the interest remains deductible. This is so regardless of the label on the loan (home equity loan, home equity line of credit or HELOC, or second mortgage). But if the proceeds are used to pay off credit card debt, take a vacation, or pay for a child’s education or wedding, the interest is not deductible.
State and Local Taxes
In 2017, if you itemized deductions you could write off all of your property taxes as well as all of your state and local income or sales taxes. In 2018 through 2025, there is a $10,000 cap on the deduction for all state and local taxes ($5,000 for married persons filing separately).
Some states, including New York, are trying to create work-arounds to enable its residents to continue reducing their federal taxes by their state and local tax payments. Some of these arrangements include treating tax payments as charitable contributions, reducing state income tax in favor of a payroll tax, and created an unincorporated business tax (as is currently in place in New York City) in lieu of state income tax. Whether any of these options will be adopted, and whether they will pass IRS muster, remain to be seen.
Casualty and Theft Losses
Until now, if you experienced a casualty or theft loss that wasn’t fully covered by insurance or other reimbursement, you could deduct the loss (after a $100 reduction) in excess of 10 percent of adjusted gross income as an itemized deduction. So if your house was robbed of valuables that were not fully insured, you could take a write off if you met the AGI threshold. If the casualty resulted from a federally-declared disaster, you could opt to deduct the loss on your return for the previous year.
Starting in 2018, there’s no deduction allowed for any casualty or theft loss, regardless of amount. This change should make individuals re-examine their insurance policies and make changes accordingly. However, a casualty in a federally-declared disaster area remains deductible. The rule permitting it to be claimed on a prior-year return still stands.
Miscellaneous Itemized Deductions
Until now, if you incurred business expenses not reimbursed by an employer through an accountable plan, they were deductible to the extent miscellaneous itemized deductions exceeded 2 percent of adjusted gross income (AGI). The same is true for investment-related expenses, tax preparation and representation costs, and certain other miscellaneous expenses.
For 2018 through 2025, the deduction for miscellaneous itemized deduction subject to the 2 percent-of-AGI floor has been suspended. The following are examples of what can no longer be deducted:
• Driving a personal vehicle on company business
• Union dues and work clothes
• Tax return preparation fees
• Expenses to produce investment income
Changes in the tax rules for 2018 require you to re-think traditional tax strategies. For example, because of some changes to itemized deductions and a substantial increase in the standard deduction, it may pay to bunch charitable contributions in one year and itemize but take the standard deduction in the following year. It may also require employers to re-think their compensation arrangements if they want to help employees cover business expenses on a tax-advantaged basis. And you shouldn’t ignore the positive changes that can help to reduce your taxes, including lower tax rates, a higher standard deduction, and elimination of the phase-out of itemized deductions for high-income taxpayers. Tax advisors will find this year to be a very busy time!
Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.