Changes in itemized deductions for 2018

As many of you are aware there were sweeping tax law changes that went into effect beginning in 2018.

These were approved very late in 2017 and many of the rule changes are still being clarified. The Tax Cut and Jobs Act of 2017 significantly changed many aspects of both the business income tax and individual income tax code. Changes occurred in many areas, especially in the area of deductions for individual income tax preparers.

A taxpayer is allowed to choose between the standard deduction or itemized deduction. The wise choice the higher of the two.

These deductions reduce taxable income and therefore the tax which a taxpayer must pay

There has been a substantial increase in the standard deduction.

For a married couple the standard deduction has been increased from $12,700 to $24,000, and for individuals and married filing separate taxpayers this standard deduction has been increased from $6,350 to $12,000. As in the past, if you are over 65 years old, blind or disabled you can tack on $1,300 each for married taxpayers and $1,600 for unmarried taxpayers.

There are new restrictions and changes in itemized deductions.

The deduction for state and local income taxes and real estate taxes combined is now limited to $10,000. This will present a substantial limit for many Ohio tax filers since we pay state and local income taxes as well as real estate taxes.

Another significant change that could adversely impact some taxpayers is the complete elimination of the ability to deduct “Job Expenses and Certain Miscellaneous Deductions.” This entire category of expenses is no longer deductible. Items that were previously deductible within this category include tax preparation fees, investment management fees, unreimbursed employee business expenses, job search expenses and safe deposit box fees.

Taxpayers who will be especially hard hit by this deduction elimination will be employees who incur substantial out-of-pocket unreimbursed employee expenses. Traveling salespeople, truck drivers, and employees who work from their own home office. Typical expenses which had been deductible in the past include mileage, travel expenses, business meals, tools, uniforms and home office expenses. Since this entire category of deductions has been eliminated, these taxpayers will no longer be able to claim this deduction. If the amount that was previously being claimed was significant, the corresponding tax impact will also be significant.

One of the implications of these changes is that many fewer taxpayers will elect to itemize.

The most common areas of itemized deductions are state, local and real estate taxes, mortgage interest and charitable contributions. Unless the total of these exceed the standard deduction amount, which is $24,000 for a married couple, then the couple should take the standard deduction. A couple will be hard pressed to surpass that figure with the sublimit of $10,000 on state, local and real estate taxes.

In other words, a typical couple would need to have over $14,000 in mortgage interest and charitable contributions combined for them to benefit through itemizing on their return.

There are a lot of new rules that have been enacted that will take years to fully understand and become the norm by which we operate by.

Gaining a better understanding of these new rules will help a taxpayer in planning their decisions which could impact their tax obligation.