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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

The Case of the Disappearing Tax Deductions

Pretty much everyone who is even aware that "tax reform" occurred with the passage of the Tax Cuts and Jobs Act (TCJA) at the end of 2017 probably knows that it reduced most tax rates and expanded a few other tax benefits.

But many seem to not know (or have forgotten) that TCJA also limited, if not eliminated, a number of itemized deductions that have been big tax savers for many individual taxpayers.

Here are five deductions you may see vanish or at least decline when filing your 2018 income tax returns: 

1. State and local tax deductions. For 2018 through 2025, your total itemized deduction for all state and local taxes combined is limited to $10,000 ($5,000 if you are married and filing separately). This includes real estate and personal property taxes.

A report recently released by the Treasury Inspector General for Tax Administration stated that about 10.9 million of us are going to feel the pinch of this limitation when filing this year.

It is important to know that you still can choose between deducting either state and local income tax or sales tax. However, you cannot deduct them both, even if your overall state and local tax deduction would not exceed the $10,000 cap.

Also, if you file Schedule C, E or F, and any of these types of taxes apply to those activities, you can still deduct them on the relevant schedule.

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to acquire, build or improve your principal residence and that of a second home. Again for the years 2018 through 2025, TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after December 15, 2017. In other words, if your otherwise qualifying mortgage balance exceeds $750,000, some of your interest likely is not deductible. 

3. Home equity debt interest deduction. Before TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose. It was a great way to do things like finance a car purchase or pay off credit cards since interest on those debts are not deductible.

TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction discussed above, i.e., used to acquire, build or improve your principal residence.

4. Miscellaneous itemized deductions subject to the 2% floor. This is a big one and hits some folks pretty hard. The deduction for expenses such as certain professional fees, investment fees, and expenses and unreimbursed employee business expenses is gone for 2018 through 2025. If you are an employee and work from home, this includes the home office deduction.

Recently, someone asked me "why did they get rid of 2106 deductions? (2016 refers to the form for unreimbursed employee expenses). This really hits us, regular employees." I have to agree. Some employees who have to use their cars for work may only get reimbursed for a partial amount of the standard mileage deduction, or even not at all, and this deduction helped them recoup part of the cost of doing so. Thatís just one example.

If this is you, I have two pieces of advice. First, complain LOUDLY to your representative in Congress. Second, talk to your employer and see if you can work out something to have more of your expenses reimbursed, even if it means a cut in taxable pay to offset it. You will still be better off.

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an officially declared disaster event by the President.

Be aware this is a general discussion and additional rules and limits could apply. Also, TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions could mean that, even if itemizing has typically been best for you in the past, you might be better off taking the standard deduction when you file your federal return.

Also, many states, such as Arkansas, have not adopted the new federal rules and have much lower standard deduction amounts, so many of the deductions may still benefit you on your state return, even if not on your federal one.

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