Form 1040 has a different look this year. Thanks to the Tax Cuts and Jobs Act (TCJA), the standard deduction has essentially been doubled while certain deductions have been modified or eliminated. Due to these changes, which are generally effective for 2018 through 2025, you may be better off claiming the standard deduction on your 2018 return, even if you have itemized in the past.
Which deductions are we talking about? Here are several items of particular interest to many individuals and self-employed individuals.
State and local taxes: As before, an itemized deduction is available for any combination of state and local tax (SALT) payments of (1) property taxes and (2) income taxes or sales taxes. But the total SALT deduction for 2018 cannot exceed $10,000. This is a significant impediment for many taxpayers, especially those in high-tax states, and may result in a switch to the standard deduction.
Mortgage interest: Previously, you could deduct mortgage interest on the first $1 million of acquisition debt and the first $100,000 of home equity debt. But the TCJA reduces the threshold for new acquisition debt to $750,000 and eliminates the deduction for home equity debt after 2017. Note that a home equity loan may qualify as an acquisition debt if the proceeds are used for home improvements.
Casualty and theft losses: The TCJA wipes out the deduction for casualty and theft losses except for losses sustained in a federal disaster area. The prior rules for claiming losses, including the floor of 10% of adjusted gross income (AGI), continue to apply.
Miscellaneous expenses: You can no longer deduct miscellaneous expenses such as employee business expenses and certain production-of-income expenses. Previously, the deduction was limited to the excess above 2% of AGI.
Moving expenses: This deduction, claimed “above the line,” is no longer available, except for certain military personnel. Also if an employer reimburses an employee for moving expenses, the reimbursements are taxable under the TCJA.
Alimony expenses: The above-the-line deduction for alimony (and the corresponding inclusion in taxable income) has been permanently eliminated. But the crackdown generally takes effect for divorce agreements or modifications made in 2019 or thereafter. For instance, if you paid alimony in 2018, you may still deduct the payments on your 2018 return.
Entertainment expenses: Under the TCJA, you generally cannot deduct costs that qualify as business entertainment. However, as clarified by recent IRS guidance, you may deduct 50% of the cost of qualified meals paid separately from other entertainment.
Section 199 expenses: The Section 199 deduction for qualified domestic production activity expenses has been repealed. As with most business-related provisions in the TCJA, this change is permanent.
Of course, the TCJA offsets these cutbacks with numerous other favorable tax provisions, including lower individual tax rates and a reduced AGI floor, from 10% to 7.5%, for medical expenses for the 2017 and 2018 tax years.
Finally, in conjunction with other changes, the TCJA repeals the “Pease rule” reducing the tax benefit of certain itemized deductions for high-income taxpayers. Unless Congress takes additional tax action, this rule will be reinstated in 2026.
If you have any questions, please reach out to your JMF tax professional.
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