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Significant Itemized Deduction Changes for 2018


The December 22nd Tax Cuts and Jobs Act contained major tax changes and reform affecting both businesses and individuals.

The following is a summary of the major changes: Tax Reform

One significant group of changes are the modifications to itemized deductions. The intent of Congress and the President was to simplify deductions for individual taxpayers. For 2017, itemized deductions begin to be phased-out when Adjusted Gross Income is above certain thresholds, $313,800 for married filing jointly, $287,650 for heads of households, $156,900 for married filing separately, and $261,500 for single filers. Beginning with tax year 2018, there is no longer a limitation on itemized deductions for higher income taxpayers. Other significant changes are as follows:

Modification of deduction for home mortgage interest:

The allowed interest deduction on the home mortgage is based on the acquisition indebtedness of the taxpayer’s principal residence and one other residence selected by the taxpayer, provided that there are two qualifying residences. For 2017, the maximum amount treated as acquisition indebtedness is $1 million ($500,000 for married filing separate). In addition, there is an additional allowed deduction for home equity indebtedness of up to $100,000 ($50,000 for married filing separately).

For 2018, a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 for married filing separately), if the house is acquired after December 14, 2017. In the case of acquisition indebtedness incurred before December 15, 2017 this limitation is still $1 million ($500,000 for married filing separate). The additional deduction for home equity indebtedness is suspended. The modifications of the home mortgage interest deductions are for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.

Limitation of deduction for taxes not paid or accrued in a trade or business:

For 2017, individuals are permitted a deduction for the following taxes not paid or accrued in a trade or business: (1) state, local, and foreign real property taxes, (2) state and local personal property taxes and (3) state, local, and foreign income taxes. The taxpayer may take the state and local general sales tax deduction in lieu of the state and local income tax deduction.

For 2018, individuals are permitted a deduction up to $10,000 ($5,000 married filing separately), except foreign real property taxes cannot be deducted. In addition, there is no allowed deduction in 2017 for prepayment of 2018 state and local income taxes, while there was no mention of prepayment for 2018 property taxes. Based on recent IRS guidance, it is reasonable to assume that the prepayment of property taxes will be allowed, if they have been both assessed and paid in 2017. The modifications of the deduction for taxes not paid or accrued in a trade or business is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025. Taxes paid in a trade or business are still deductible and do not have limitations.

Modification to the charitable contribution deduction:

For 2017, generally the charitable contribution deduction is limited to 50 percent of Adjusted Gross Income.
For 2018, the limit is increased to 60 percent. In addition, no charitable contribution deduction is allowed for a payment to an institution of higher education in exchange for which the taxpayer receives the right to purchase tickets or seating at an athletic event. These two modifications are effective for contributions made in taxable years beginning after December 31, 2017. The increased 60 percent limit is effective until tax years beginning after December 31, 2025.

Repeal of miscellaneous itemized deductions subject to the two-percent floor:

For 2017, some itemized deductions are allowed in excess of two-percent of Adjusted Gross Income for the taxpayer. Examples of these include tax preparation fees, unreimbursed employee expenses, the home office deduction, deductible investment expenses from pass-through entities, and investment advisory fees.

For 2018, miscellaneous itemized deductions subject to the two-percent floor are suspended. The suspension of the miscellaneous itemized deductions subject to the two-percent floor is for tax years beginning after December 31, 2017 until tax years beginning after December 31, 2025.

Modification to the medical expenses deduction:

For tax years beginning after December 31, 2016 and ending before January 1, 2019, the threshold for deducting medical expenses has changed from 10 percent to 7.5 percent of Adjusted Gross Income. The deduction reverts back to 10 percent of Adjusted Gross Income for tax years beginning after December 31, 2018.
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Your team at Berntson Porter looks forward to working with our clients on this historic change to our tax system. If you have any questions, please contact your tax professional at Berntson Porter & Company, PLLC at 425-454-7990.