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:

  1. are a married taxpayer who files separately and whose spouse itemizes deductions
  2. are not a U.S. citizen or resident for the full year
  3. 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.

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