Several itemized deductions were eliminated or limited or eliminated by the Tax Cuts and Jobs Act (TJCA), which was signed into law in 2017. Due to the tax reform, many people who had previously itemized on Schedule A now take the standard deduction. Exemptions, deductions, and credits were eliminated, limited, reduced, or changed by the passage of the TCJA as a result of its passage.
What You Should Know
- There were a number of deductions, credits, and limits that were eliminated or limited under the Tax Cuts and Jobs Act, including the standard deduction, which will be phased out by 2025.
- In addition to the Child Tax Credit, personal and dependent exemptions are no longer valid.
- Moving expenses and alimony are no longer deductible, while mortgage interest and property taxes are limited.
- Investing, tax preparation, and hobbies are among the expenses no longer deductible.
- Charitable deductions have been increased, and gambling expenses are deductible.
Credits and exemptions
All three items were affected by the TCJA, and each affects the amount you pay in a different way. Deductions and exemptions reduce your taxable income, while tax credits reduce your taxes.
The Internal Revenue Service (IRS) provides a worksheet that shows the amount of taxes you owe based on your taxable income. Let’s say your taxable income is $100,000. You fall into the 24% tax bracket.
In contrast, a tax credit of $10,000 would result in an AGI of $100,000, but taxes would be just $5,009 compared to $12,788 with a deduction (or exemption) of $10,000.
It is not technically a deduction, but an exemption allows you to reduce your taxable income by the amount of your exemption. The new law suspended personal and dependent exemptions between 2018 and 2025. Assume the exemption amount is $4,050 for you and your dependents. In any case, the exemption amount is zero. You may be eligible for other tax benefits despite not being able to claim a personal or dependent exemption.
Children’s Tax Credit
Parents with higher incomes than previously could receive the child tax credit (CTC) because of the TCJA, which doubled the credit from $1,000 to $2,000. For the 2021 tax year, that limit was increased again to $3,000 for children ages six through 17 and $3,600 for children under five. These reverted to the original amount of $2,000 for 2022 and 2023. Those who are single or married file jointly have a threshold of $200,000 and $400,000 before they receive the credit.
You can still receive a partial credit for the child tax credit, even if you do not owe taxes due to low income, which would provide (or increase) your refund. If you have dependents who are 18 years or older, you can also claim a $500 tax credit. This credit comes directly off your total taxes owed.
- Having social security numbers
- You provide financial support to your parents or other qualifying relatives
- Supporting non-related dependents
Deduction for higher standard deviation
For people filing alone in 2022 (filed in 2023) and in 2023 (filed in 2024) the standard deduction will increase to $12,950. For married couples filing jointly, the deduction will increase to $25,900 in 2022 and $27,700 in 2023.
For people over 65 years old and blind, there are higher standard deductions under the federal income tax system and in some states. For 2022 and 2023, blind people or those 65 and older who are single can take a standard deduction of $1,750. For 2022 and 2023, if one of you is 65 and older, your standard deduction will go up by $1,400 and $1,500.
Benefits of commuter taxes
You could receive a tax-free reimbursement up to $20 a month or $240 a year for bicycle commuting expenses in the past. Additionally, your employer could take a deduction for providing the benefit. That benefit was suspended under the TCJA for both bike commuters and employers. In addition, it ended the deduction for parking, transit, and carpooling.
TCJA doesn’t define which expenses qualify, and the IRS hasn’t provided any guidance on which expenses qualify. Employers will still be able to deduct commute expenses deemed “necessary for ensuring the safety of the employee.”
Parking, transit, and carpooling benefits will continue to be tax-free for employees in 2022 and 2023 respectively.
Despite this, employers often have little incentive to offer bicycle-commuting benefits since there’s no deduction for them. Employers may also offer bicycle-commuting benefits for any amount.
Tax Deduction for Moving Expenses
As an above-the-line deduction, relocation costs for a new job used to be deducted from your gross income, allowing you to calculate adjusted gross income (AGI) by subtracting them from your gross income. It does not matter how far you move. Moving expenses are not deductible at all. If you are an active-duty military member and move for service-related reasons, the deduction still applies.
Deduction for alimony
Alimony payments used to be eligible for above-the-line deductions, and alimony payments were counted as taxable income by the recipients. Any divorce after Dec. 31, 2018 no longer qualifies for a deduction for the paying spouse, and no longer qualifies for taxable income for the receiving spouse. Child support payments initiated before 2019 are not affected. They are also tax-free for the recipient and nondeductible for the paying spouse.
Give an IRA as a gift
If the paying spouse gives the receiving spouse a lump-sum individual retirement account (IRA), they will get a tax deduction since they are essentially giving away money they would otherwise have had to pay tax on.
Receiving spouses will have to pay taxes on withdrawal (including a 10% penalty if they withdraw before age 561), but they will also have the benefit of tax-free growth until they withdraw. If the receiving spouse needs money right away, it may not be ideal to transfer the IRA account tax-free.
Deduction for medical expenses
Schedule A still allows for medical expenses to be deducted if they exceed 7.5% of your adjusted gross income. This deduction can be claimed on Lines 1–4 of Schedule A.
In most cases, cosmetic surgery will not qualify for deductible expenses.
Tax deduction for SALT
State and local taxes (SALT) used to be deductible in the unlimited amount on Schedule A. TCJA limits the SALT deduction to $10,000 ($5,000 if you’re married and filing separately). This includes income taxes (or general sales taxes), real estate taxes, and personal property taxes.
State income taxes or property taxes, such as those in New York and California, can make this a big problem for some people.
Fight Back by States
By offering residents the option to contribute to a state charitable fund instead of paying taxes, some states tried to offset the cap. On federal returns, the payments could be deducted as charitable contributions. The IRS and Treasury issued final regulations curtailing the practice in June 2019.
As a result of the federal court’s dismissal of the lawsuit in September 2019, four states faced constitutional challenges to the SALT cap.
Taking advantage of the fact that businesses have no limit on deducting state and local taxes, New York created a workaround called the Employer Compensation Expense Tax.
As a result of the Connecticut Pass-Through Entity Tax Credit, pass-through entities are taxed and their partners are also provided a tax credit.
Taxes on foreign property
Previously, foreign property taxes were deductable on Schedule A as if they were paid on a regular residence or second residence. If you paid foreign property taxes on a regular residence or second residence, you could deduct them on Schedule A.
Expenses related to housing that qualify
For U.S. citizens and residents who live outside the United States and earn wages abroad, foreign property taxes are now considered a qualified housing expense on Form 2555, Foreign Earned Income. The following items qualify as qualified housing expenses: rent, utilities (except phone charges), parking, furniture rental, etc.
If you are planning to claim this deduction, you should consult a qualified tax expert.
Incentives for mortgages
It used to be possible to deduct up to $1 million in interest on mortgage debt ($500,000 for married taxpayers filing separately). On or before Dec. 16, 2017, you can deduct interest on any loan you originate. The new limit is $750,000 if you originate the loan after that date ($375,000 if you are married and filing separately).
For people who take the standard deduction, the change doesn’t matter since the mortgage interest deduction is only available if you itemize on Schedule A.
Interest deduction for HELOCs
Home equity loans and home equity lines of credit (HELOCs) could previously be deducted the same way as mortgages, regardless of how you used the money. This deduction has been eliminated, at least in part. Since 2018, you cannot deduct interest on these types of loans except under certain circumstances, no matter when you took out the loan.
Interest on HELOCs
Home equity loans or lines of credit may still be deductible if used for the purchase, construction, or substantial improvement of your primary residence or second residence.
If you plan to take out a home equity loan to finance the repairs, it must be on the property you are renovating. For example, you cannot use your city apartment to finance the ski house repairs. As long as the refinanced amount does not exceed your old loan balance (or if no cash is taken out), you can also deduct the interest on an existing mortgage.
Deduction for casualties and thefts
In the form of Schedule A, you can deduct casualty and theft losses if the loss is not covered by your insurance policy or disaster relief.
If your county has not been declared a federal disaster area, even if the county next door is, you can still take the deduction.
Itemized deductions for miscellaneous items
The 2% of AGI threshold for miscellaneous Schedule A itemized deductions was eliminated in 2018. This includes deductions such as:
- Expenses that are not reimbursed on the job. Travel, transportation, meals, union dues, business liability insurance, depreciation on office equipment, work-related education, home office expenses, expenses incurred while searching for a new job, legal fees, uniforms, and uniform wear are examples of work-related expenses you have paid out of pocket. All of these are gone. You can ask your employer to reimburse you for these expenses. The reimbursement is tax-free. Pay raises are also possible, but they are taxable.
- An investment expense is a fee associated with advice or management of an investment, tax or legal advice, trustee fees (i.e., fees associated with managing an IRA or other investment), or a safe deposit box rental fee. The items above are no longer deductible, but you can deduct the interest on the loan you pay to purchase an investment if you itemize. You can only deduct the amount of taxable investment income that you earn each year.
- A tax preparation fee includes the cost of software, hiring a tax professional, or buying tax publications. In addition, you will no longer be able to deduct electronic filing fees and fees paid to fight the IRS, including attorney fees, accounting fees, or fees paid to contest rulings or claim refunds. Request a separate bill for your personal and business taxes if you hire a tax preparation firm. Your business expenses can be fully deducted if you pay a tax preparer to prepare your business tax return.
- In spite of the fact that you do have to report (and pay taxes on) any income you earn from your hobby, hobby expenses are no longer deductible, up to the amount you earn each year. When calculating hobby-related income, you can deduct the cost of goods you sell to customers.
There is still time to itemize deductions
There are still a few miscellaneous itemized deductions available after 2018:
- Under the TCJA, you can deduct gambling losses up to your winnings for the year. Gambling losses are not subject to the 2% miscellaneous itemized deductions limit.
- No matter whether you itemize deductions or not, student loan interest remains deductible ($2,500 or the amount you pay during the year-whichever is lower).
- If a classroom teacher does not itemize, they are still eligible for the $250 deduction.
- Military members will be able to deduct $0.18 per mile in 2022. Charities will be able to deduct $0.14.
A note for teachers
In addition to professional development courses, books, supplies, computer equipment, and supplementary materials used in the classroom, teachers are still allowed to deduct up to $300 per year in unreimbursed education expenses.
The TCJA also improved several other tax benefits.
- In 2022 and 2023, the estate tax exemption will be $12.06 million and $12.92 million, respectively.
- Death or disability-related discharges of student loan debt are not taxable since 2018. Previously, it was taxable to the borrower or their heirs.
- As a result of the TCJA, itemized AGI deductions are not subject to limitations, although other limitations may apply.
- Most cash or check donations by charitable organizations can be up to 50% of your adjusted gross income.
In 2022, were federal taxes lower?
Income thresholds, on the other hand, change every year. They tend upward every year.10 Federal tax brackets remain unchanged at 10%, 12%, 22%, 24%, 32%, 35%, and 37% in 2022 (and 2023) as well.
Does the TCJA still apply?
For the majority of the changes that were enacted, the Tax Cuts and Jobs Act remains in effect until 2025.
When did the TCJA take effect?
As a result of the TCJA, income thresholds and tax brackets have changed. For instance, if you were previously in the 15% tax bracket, you are now in the 12% bracket.
Your financial situation and the types and amounts of deductions you may be able to take will determine whether the TCJA or other changes will negatively impact you. There is no guarantee that Congress will extend the changes implemented by this legislation after Dec. 31, 2025. The IRS’s publication Tax Reform: Basics for Individuals and Families provides more information.