Personal Exemption
The new tax law suspends the deduction for individual
exemptions for the 2018–2025 tax years. This is offset
by a significant increase in the amount of the child tax
credit from $1,000 to $2,000 per qualifying child, and
the provision of a new $500 nonrefundable credit for
dependents other than qualifying children. The
child tax credit
is explained in greater detail family matters section.
Standard Deduction
The standard deduction is a specified dollar amount, based
on your filing status, which reduces the income on which
you are subject to tax. In general taxpayers can choose
whether to claim the standard deduction or itemized
deductions (discussed below). However, you are not
entitled to the standard deduction if you:
-
are a married taxpayer who files separately and whose
spouse itemizes deductions
-
are not a U.S. citizen or resident for the full year
-
file for a period of less than 12 months due to a change
of accounting period.
The standard deduction amounts for all categories are:
These amounts will be adjusted for inflation for tax
years beginning after 2018 and are scheduled to sunset
after 2025. The new law retains the additional standard
deduction for the elderly and the blind, discussed below.
The increase in the standard deduction introduced by
the new tax law, in conjunction with the repeal of many
itemized deductions (discussed below), is intended to
significantly reduce the number of taxpayers who itemize
their deductions and thus to simplify the tax return
preparation process.
For the Elderly or Blind
An additional standard deduction is available to taxpayers
who are elderly or blind. The additional deduction amounts
vary for single filers and heads of household, and
for married taxpayers (whether filing jointly or
separately) and qualifying widows and widowers. Note that
these additional amounts are cumulative. Thus, married
taxpayers filing jointly who are both over 65 and blind could
claim four additional deduction amounts.
Itemized Deductions
The new tax law makes significant changes to the scope of
itemized deductions available to individual taxpayers.
Under prior law many individual taxpayers were able
to claim itemized deductions to decrease their taxable
income. The new law contains a number of provisions that
suspend or modify these deductions. As a result, many
taxpayers who previously itemized their deductions will
now find it more beneficial to claim the standard deduction.
State and Local Income Tax Deductions
Under the new law, for tax years 2018–2025, itemized
deductions for state and local income taxes, property
taxes, and sales taxes are limited to $10,000 in the
aggregate. This cap is not indexed for inflation. The cap
does not apply to personal or real property taxes incurred
in carrying on a trade or business or otherwise incurred for
the production of income.
In addition, foreign real property taxes, other than those
incurred in a trade or business (such as a rental activity) are
not deductible to any extent.
Under prior law state and local property taxes and either
state and local income or sales taxes were generally
deductible in full (subject to the phase-out applicable to
taxpayers whose income exceeded prescribed thresholds)
and constituted some of the most significant reductions to
taxable income. However, the new cap on such deductions
will cause many individuals to claim the standard deduction
rather than itemize. If you live in a state that imposes
relatively high state income taxes it is likely that you will
see a significant impact from the imposition of this cap and
it might cause your tax liability to increase notwithstanding
the overall reduction in tax rates.
Interest Deductions
Interest deductions fall into one of five categories—
investment interest, home mortgage interest, trade or
business interest, passive activity interest, or personal
interest—depending on the context in which you borrow
the funds or the manner in which you use the proceeds.
To maximize the tax benefit of your interest deduction, you
must understand the type of interest expense for which
you are planning. Depending on how you characterize
interest, you may be subject to different deduction
limitation rules and various restrictions.
If you report your income on a cash basis (as most
individuals do), you may not deduct any accrued but
unpaid interest. Likewise, you normally cannot deduct
interest paid before it is accrued (prepaid interest). Under
most circumstances, you may defer an interest expense
deduction until you pay the interest.
Investment interest
Investment interest, as a rule, is any interest you incur to
buy or carry investment property—property that produces
portfolio-type income such as dividends, interest, annuities,
and royalties not derived in the ordinary course of a
trade or business. You cannot deduct more than your net
investment income (investment income less investment
expense). Investment interest may be carried over to the
following year.
Home mortgage interest
The new tax law makes significant changes to the
deductibility of home mortgage interest that are especially
likely to affect you if you purchase a new home during
the years 2018–2025 and incur a mortgage to finance
the purchase.
Under prior law, qualified residence interest could be
claimed as an itemized deduction, subject to certain
limitations. Qualified residence interest included interest
paid on debt incurred to acquire, construct or substantially
improve your principal or second residence (“acquisition
indebtedness”), and also interest on home equity
indebtedness, without regard to how the proceeds of the
debt were used (except for purposes of the alternative
minimum tax—AMT).
The new law suspends the deduction for interest on
home equity indebtedness for 2018–2025. For the same
tax years, the deduction for interest on acquisition
indebtedness is also limited by reducing the amount of
debt that qualifies as acquisition indebtedness from $1
million to $750,000. Any debt you may have incurred
before December 15, 2017, is “grandfathered” and thus
not affected by this reduction. Also, any debt you may have
incurred before that date but refinanced later continues to
be covered by the prior rules provided the amount of the
debt does not exceed the amount refinanced. However,
if you are considering moving your home during the
years 2018–2025 and financing the purchase with a new
mortgage, the reduced deduction for home mortgage
interest is likely to affect you.
Trade or business interest
In most instances, you can fully deduct interest you incur in
connection with a trade or business. You also may be able
to deduct interest expense related to amounts you borrow
personally and contribute to a trade or business. However,
you must trace the indebtedness to the trade or business
using the interest allocation rules. To the extent you do
not materially participate in the trade or business, the
deductions may be suspended under the passive loss rules.
Passive activity interest
A passive activity is any business activity in which you
do not materially participate. Most rental activities are
also considered passive activities. Deductions for passive
losses are limited to passive income. Special rules apply
for taxpayers who perform more than half their personal
services, and more than 750 hours of such services, for
real property trades or businesses in which they materially
participate (
see further discussion of passive activity rules and the exception applicable to real
estate professionals in this section
).
Personal interest
Personal interest is any interest that does not fall into
one of the other four categories. This includes interest
on credit cards, personal loans, automobile loans, and
tax underpayments. You cannot deduct your personal
interest expense. Interest on qualified education loans is
deductible, subject to certain limitations
Keeping track of loan proceeds
As a general rule, how and when you spend the proceeds
of a loan will determine whether you receive a deduction.
When you use the proceeds of a loan for multiple
purposes, you must trace the amounts and allocate them
accordingly. The burden of proof on tracing loan proceeds is
on you, the taxpayer.
Medical Expense Deductions
Generally, you may deduct unreimbursed medical expenses
that exceed 7.5% of your AGI. You may be able to
shift medical expenses between years to take advantage of
the AGI limit.
You may also deduct expenses you paid for medical care
of a child who receives more than half of his or her support
from you.
Deductible medical expenses include certain items
specifically prescribed for a medical or physical purpose
by a doctor (for example, the cost of a diet and exercise
program undertaken on the advice of a physician for
treatment of high blood pressure). Generally, you
cannot take a deduction for cosmetic surgery, and
reimbursements by your employer for such surgery are
taxable. However, the expense of surgery to correct a
congenital deformity, a disfiguring personal injury, or
disease remains deductible.
Moving Expense Deductions
The deduction for moving expenses is suspended by the
new tax law for tax years 2018–2025. This deduction, which
was “above the line” and therefore available to individuals
regardless of whether they itemized their deductions,
was a significant benefit to employees who moved to a
new place of work. If you have moved to a new place of
work or plan to do so, you (and your employer) should be
aware that any moving expenses you pay are no longer
deductible, and any reimbursement of such expenses from
your employer is no longer excludible from your income.
Miscellaneous Itemized Deductions
The new tax law suspends the deduction for miscellaneous
itemized deductions for tax years 2018–2025. Previously,
miscellaneous itemized deductions included deductions
for expenses of unreimbursed employee travel, and
transportation, meals and entertainment, certain job-related
uniforms and tools, dues to professional organizations,
subscriptions to professional journals, job-hunting costs,
and professional tax return preparation. In addition, the
deduction for expenses paid or incurred for the production
of income or maintenance of income-producing property
is suspended. These expenses include certain investment
fees; subscriptions to investment publications, safe deposit
box rental; and certain legal, accounting, and custodial fees.
Employee Education Expenses
Under prior law it was possible to deduct education
expenses as miscellaneous itemized deductions, including
tuition, books, supplies, transportation, and parking,
provided they maintained or improved your skills in a job you
already had or enabled you to satisfy express requirements
for keeping an existing job. Away-from-home expenses
incurred in pursuit of such studies could also be deducted.
Under the new tax law, these expenses are no longer
deductible as miscellaneous itemized deductions for the
2018–2025 tax years. However, if your employer pays
the expenses or reimburses you for expenses that you
substantiate under an accountable plan, your employer
can exclude this amount from your income reported on
Form W-2.
Phase-Out of Itemized Deductions
Prior to the changes introduced by the new tax law,
allowable itemized deductions (with the exception of
medical expenses, investment interest, theft or gambling
losses) were subject to phase-out for taxpayers whose
income exceeded certain thresholds. The new tax law
abolishes this limitation on itemized deductions for tax
years 2018–2025. Thus, although you are likely to find that
the total amount of deductions to which you are entitled
has been reduced, the itemized deductions that you can
claim are no longer subject to limitation under this rule.