New Tax Law Limits Bring Changes to Itemized Deductions

Prepared by Carolyn Corey, CPA– Tax Senior

The Tax Cuts and Jobs Act brings changes in the deductions available to individual taxpayers for tax years 2018 through 2025. The standard deduction is nearly doubled and there are modifications to itemized deductions.

One of the changes to itemized deductions is the new $10,000 limitation for the deduction of taxes. Questions have been raised as to what deductions are and are not impacted by this limit.  Taxpayers can claim an itemized deduction of up to only $10,000 for the total of:

  1. State and local income taxes. This would include state taxes withheld and taxes paid during the year related to state income tax returns as well as the sales taxes that some taxpayers elect to deduct in lieu of income taxes.
  2. State and local real estate taxes, and
  3. State and local personal property taxes.

There are some taxes that are not subject to the limitation. The $10,000 limitation does not apply to real estate taxes paid for business property or residential rental property, as these are not itemized deductions on Schedule A, but are deductions reported elsewhere on the return.

The $10,000 limitation applies to married individuals filing a joint return and individuals filing single or as head of household. The limitation is $5,000 for married individuals filing separately.

Mortgage interest paid is still a separate itemized deduction, as are charitable contributions and medical expenses that exceed the percentage of income threshold. Miscellaneous itemized deductions, which include unreimbursed employee business expenses and investment advisory fees, are no longer deductible under the new law. The new law also repeals the overall limitation on total itemized deductions for high income earners.

Remember, these are changes that will take effect in 2018.  They do not apply to the 2017 tax return that is due this April 15th.  For 2017, the rules are the same as they were for 2016.  Your actual tax expense can be deducted, and the portion of your miscellaneous itemized deductions that exceeds 2% of your adjusted gross income is deductible as well.

If you have any questions, please contact us.