The change in the new tax law that affects the most individuals is the increase in the standard deduction. Because of this, and the changes below, it is estimated the percentage of filers who itemize their deductions will decrease from 33% to about 8%.
The changes in itemized deductions affects mainly upper-income taxpayers (with some notable exceptions). There are two reasons for this:
- Higher income taxpayers are more likely to itemize deductions
- The most onerous reductions affect high-income taxpayers the most
First, the enhancements:
- The medical expense ‘floor’ is reduced from 10% of AGI to 7.5% for all taxpayers in 2018 only
- The limit for charitable contributions is increased from 50% to 60% of AGI
- The phase-out of itemized deductions for upper-income taxpayers is eliminated
Not a very long list of pro-taxpayer enhancements. With the vast majority of taxpayers experiencing a tax reduction due to the new act, and to keep it essentially ‘revenue neutral’, someone has to pay higher taxes. For the most part, that will be upper-middle class and higher income taxpayers.
- The elephant in the room is the limitation on the deduction of SALT taxes to $10,000 per tax return ($5,000 if Married Filing Separately). Note: the ability to deduct business property taxes for farmers, landlords, and other businesses are not affected by this limitation.
- All 2% miscellaneous deductions are repealed. The most prevalent of these are a) Employee business expenses [ex: traveling salesmen or OTR truck drivers who are W-2 employees], and b) Investment advisory fees and expenses. Gone, gone, gone!
- HELOC loan interest no longer deductible. (There goes years of tax advice…)
- Acquisition interest on home new mortgages limited to $750,000 of debt (formerly $1 million under prior law). The new limit applies to acquisitions after 12/14/17.
- Personal casualty losses, unless in a Presidentially declared disaster area, are repealed. (Business casualty losses are not effected).
Whew! There are a few other take-aways that aren’t itemized deductions.
- Moving expense deductions are repealed, except in the case of members of the military. This also means employers can’t offer tax-free moving expense reimbursements. (Iowa didn’t adopt this change for 2018.)
- For divorce decrees signed after 2018, alimony payments will no longer be deductible to the payor (or taxable to the recipient). Prior decrees are treated as they were before the law change, unless they are modified in 2019 or later.
For many affected taxpayers, these changes will be mitigated to some extent by rate reductions and the expanded exemption from Alternative Minimum tax. But for high income taxpayers, especially in high tax states, taxes are on the way up.