Itemized deductions are subtracted from adjusted gross income in arriving at taxable income; they may be claimed in addition to deductions for adjusted gross income. Itemized deductions are also referred to as “below-the-line” deductions. As discussed below, the 2017 Tax Act made substantial changes to the availability of itemized deductions.
1. How did tax reform impact the deduction for state and local sales, income and property taxes?
Under prior law, taxpayers were entitled to deduct (as an itemized deduction) taxes for (1) state and local real and foreign property taxes, (2) state and local personal property taxes, and (3) state, local and foreign income taxes. Taxpayers could also elect to deduct state and local sales taxes instead of state and local income taxes. Property taxes were allowed only as an itemized deduction unless they were incurred in connection with a trade or business.
The 2017 Tax Act limited the ability of taxpayers to deduct state and local taxes (including sales, income and property taxes), imposing a cap of $10,000 ($5,000 for married taxpayers filing separate returns) on this deduction. Foreign real property taxes can no longer be deducted.
Individuals will remain able to deduct state and local sales and property taxes when they are paid in connection with carrying on a trade or business.
These rules apply for tax years beginning after December 31, 2017, and before January 1, 2026.
2. Did tax reform impact the mortgage interest deduction?
The 2017 Tax Act limited the mortgage interest deduction to $750,000. This limit applies to debt incurred after December 31, 2017, and before January 1, 2026. After December 31, 2025, the $1 million mortgage interest deduction will be reinstated and will apply regardless of when the taxpayer incurred the relevant debt.
Home equity indebtedness interest cannot be deducted for tax years beginning after December 31, 2017, and before January 1, 2026.
The $750,000 limit does not apply with respect to debt incurred on or before December 15, 2017. If the taxpayer enters a binding contract on or before December 15, 2017, to close on the purchase of the taxpayer’s personal residence before January 1, 2018, and if the taxpayer actually purchases that residence before April 1, 2018, the debt will be treated as though it was incurred before December 15, 2017.
Debt amounts that are related to a refinancing will be treated as though incurred on the date that the original debt was incurred, provided that any additional amounts of debt incurred as a result of the refinancing do not exceed the amount of the refinanced debt. However, this exception does not apply if the refinancing occurs after the expiration of the term of the original debt. Further, it does not apply if the original debt was not amortized over its term, the expiration of the term of the first refinancing of the debt or, if earlier, the date which is 30 years after the date of the first refinancing.
3. Did tax reform change the rules governing the itemized deduction for charitable contributions?
The 2017 Tax Act substantially changed the treatment of itemized deductions at the individual level. However, the deduction for charitable contributions remained in place. Under the legislation, the 50 percent AGI limitation on cash contributions to public charities and certain private foundations increased to 60 percent. This provision is effective for tax years beginning after December 31, 2017, and before January 1, 2026. Amounts that exceed the 60 percent limitation can be carried forward for five years.
Further, the 2017 Tax Act repeals the previously existing 80 percent charitable contributions deduction for payments made in exchange for seating rights at college athletic events. This provision is effective for tax years beginning after December 31, 2017.
The 2017 Tax Act eliminated the exception under IRC Section 170(f)(8)(D) that relieves taxpayers of the obligation of providing a contemporaneous written acknowledgement by the donee organization for contributions of $250 or more when the donee organization files a return with the required information. This provision is effective for tax years beginning after December 31, 2016.
4. Can taxpayers still deduct casualty and theft loss expenses under the 2017 Tax Act?
Under the 2017 Tax Act, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions (when those losses were not related to property used in a trade or business). However, the Act contained an exception for losses that occur in federally declared disaster areas.
Further, if a taxpayer has personal casualty gains, the new rules do not apply (even if the loss does not occur in a federal disaster area) so long as the losses do not exceed the gains. This essentially means that casualty losses can be used to offset casualty gains.
This provision applies for tax years beginning after December 31, 2017, and before January 1, 2026.
5. Can taxpayers deduct loss expenses related to gambling under the 2017 Tax Act?
Yes. However, the 2017 Tax Act clarifies that the limitations on losses related to gambling that may be deducted also include other expenses incurred in connection with the gambling (i.e., the cost of travelling to and from a casino are subject to the Section 165(d) limitation). This essentially means that costs associated with a trade or business of gambling are now included in the loss limitation.
This provision applies for tax years beginning after December 31, 2017, and before December 31, 2025.
6. Can taxpayers deduct medical expenses under tax reform? What should individuals know about the medical expense deduction under tax reform?
Yes. The 2017 Tax Act modified the medical expense deduction so that, for tax years beginning after December 31, 2016 and ending before January 1, 2019, a more generous 7.5 percent floor will apply to the medical expense deduction, so that taxpayers are entitled to deduct medical expenses to the extent that the exceed 7.5 percent of adjusted gross income.
For 2017 and 2018, this 7.5 percent threshold also applies for purposes of the alternative minimum tax.
Because of the short window for using the expanded medical expense deduction, individuals should be advised as to the wide array of expenses that qualify as “medical expenses” for purposes of the medical expense deduction. In addition to obvious expenses such as health insurance premiums, medical procedures and Medicare premiums, costs for items such as bandages, dental and vision care and certain travel and meal expenses may be included. Conversely, items such as contributions to HSAs and health FSAs are specifically made ineligible.
IRS Publication 502 provides a comprehensive list of items that both are and are not eligible for the medical expense deduction.
7. How does the 2017 Tax Act impact miscellaneous itemized deductions that are subject to the 2 percent AGI floor?
The 2017 Tax Act suspends all miscellaneous itemized deductions for tax years beginning after December 31, 2017 and before January 1, 2026. This includes the deduction for tax preparation services and the deduction for expenses attributable to the trade or business of being an employee. Investment advisory fees are also no longer deductible under the new tax law.
The provision for the above-the-line deduction for certain teacher’s expenses was retained.
The limitation on itemized deductions that applied to certain high-income taxpayers was also suspended for tax years beginning after December 31, 2017, and before January 1, 2026.
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