The Tax Cuts and Jobs Act (HR 1, “TCJA”), which took effect in 2018, massively changed the tax landscape for all taxpayers. For individual taxpayers, it both gave and took away. It almost doubled the standard deduction to $12,000 for singles and $24,000 for marrieds filing jointly. However, it also eliminated or curtailed many personal deductions. With such a large standard deduction, far fewer people will be able to itemize their personal deductions than in the past. Here are the top personal deductions that remain for individuals, most of which can only be taken if you itemize.
1. Mortgage interest
If you itemize, you can deduct the mortgage interest (not the principal) that you pay on a loan secured by your primary residence or a second home. To claim the deduction, you must be obligated to pay the debt and you must actually make the payments. For first and second homes purchased before December 15, 2017, interest on home loan acquisition debt up to $1 million is deductible. For homes purchased after December 15, 2017, homeowners are allowed to deduct the interest on only up to $750,000 in acquisition debt for a first and second home. This 25% reduction in the mortgage interest deduction is scheduled to remain in effect during 2018 through 2025. However, the reduction does not apply to refinancings of homes purchased before December 15, 2017 as long as the new loan does not exceed the amount of the mortgage being refinanced.
2. State and Local Taxes
If you itemize, you may deduct your state and local taxes. This includes (1) property taxes, and (2) state income or sales taxes, whichever is greater. In the past, there was no limit on this deduction. However, as a result of the TCJA, taxpayers may deduct a maximum of $10,000 in state and local taxes each year during 2018 through 2025. This $10,000 limit applies to both single and married taxpayers and is not indexed for inflation.
3. Charitable donations.
If you itemize, you can deduct any cash or noncash contributions you make to a qualified nonprofit organization. You are supposed to have documentation for any cash contribution, including contributions under $250. For all noncash (property) contributions and cash contributions over $250, you must have a receipt or acknowledgement from the nonprofit organization. For noncash (property) contributions over $500, you have to file an extra form with your tax return, Form 8283, Noncash Charitable Contributions.
4. Medical expenses and health savings accounts.
If you itemize, you can deduct the amount of your medical and dental expenses that exceed a certain percentage of your adjusted gross income. For 2017 and 2018, this percentage is 7.5%. So if your AGI is $100,000, you can deduct your medical expenses only if and to the extent they exceed $7,500. The threshold is scheduled to increase to 10% of AGI in 2019. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance for both you and your dependents. Unless your medical expenses are substantial, however, your medical expenses will probably fall below the AGI percentage limitation, meaning you won't be able to deduct anything.
If you have a qualified Health Savings Account (HSA), you can deduct your contributions to the account, and you don't have to pay tax on any interest you earn from the account. To establish an HSA account, you must have a high-deductible health plan that qualifies under the HSA rules. You can use money in your HSA account to pay almost any kind of health-related expense.
5. 401(k) and IRA contributions.
If your employer offers a 401(k), it pays to maximize your contributions, especially if your employer matches them. The maximum contribution is $18,500 (2018). If you are 50 or older, you can contribute an extra $6,000 per year.
For IRAs, you can contribute $5,500 (2018), and deduct that amount from your income—however, this deduction is phased out if your income is over certain limits and you and your spouse have a workplace retirement plan. If you are 50 or older, you can contribute an extra $1,000.
6. Student loan interest.
You can deduct up to $2,500 in student loan interest payment per year, for the lifetime of the loan (income limits apply). This Student Loan Interest Deduction was made permanent by tax legislation passed in January 2013 and it was not changed by the Tax Cuts and Jobs Act. This is an “above the line” deduction that you can take without itemizing your personal deductions. This means all taxpayers who qualify may take it.
7. Education expenses.
In addition, you can set up a Coverdell education savings account and contribute up to $2,000 per year (with phase-outs for higher income people). These contribution amounts were made permanent as part of the fiscal cliff tax legislation passed in 2013. The amount you contribute isn't deductible, but distributions from the account for payment of tuition are tax free. You can also set up a state-sponsored college savings plan, known as a Section 529 plan, which allow tax-free withdrawals for qualified college expenses. In addition, starting in 2018, the TCJA allows up to $10,000 to be withdrawn from a 529 plan each year to pay for elementary and secondary school tuition—a boon to parents who send their children to private schools.