The sweeping new federal tax law dramatically changes many deductions that you may have been taking in previous years. These changes, which for the most part took effect for the 2018 tax year, are generally scheduled to expire after 2025, unless Congress acts to extend or change the law before then.
The new tax law nearly doubles the amount of the federal standard deduction, which means that many more individuals will forgo itemizing in favor of using the standard deduction. However, depending on your situation, you may be better off itemizing. There is no longer any overall income limit on itemizing.
Here are the major changes to deductions for the 2018 tax year…what’s the same…and what deductions you can take.
The Standard Deduction and Personal Exemptions
- The standard deduction for 2018 is $12,000 for individuals and $24,000 for married people filing jointly, up from $6,350 and $12,700, respectively, in 2017.
- There are no personal and dependent exemptions allowed anymore .
- Out-of-pocket medical costs can be claimed as an itemized deduction on your 2018 return to the extent they exceed 7.5% of your adjusted gross income (AGI), regardless of your age. Starting in 2019, the AGI threshold is set to jump to 10% for all taxpayers—there will be no exception for seniors as there had been in the past.
- All of the same types of medical costs as in the past continue to be deductible, including health insurance co-payments and the cost of medical devices (glasses, hearing aids, wheelchairs, etc.).
- The portion of long-term care insurance premiums that can be deducted, which is based on age, has increased for 2018 to a maximum of $5,200, up from $5,110.
- If you drive your car to see doctors, therapists and other medical practitioners, or to pick up prescriptions, you can deduct your mileage at the rate of 18 cents per mile (up from 17 cents per mile in 2017), plus parking and tolls.
- Self-employed individuals can continue to deduct 100% of their health insurance premiums as long as that does not exceed the earnings of the business for that year.
- Contributions to health savings accounts (HSAs) remain deductible in figuring AGI. New HSA contribution limits apply for 2018: $3,450 for self-only coverage and $6,900 for family coverage (up from $3,400 and $6,750, respectively, in 2017). And you can still make a catch-up contribution of $1,000 if you’re 55 or older.
- Examples of allowed medical deductions include…
- Alcoholism and drug/nicotine addiction treatment programs.
- Capital expenditures for home improvements required to accommodate a disability. Examples: Elevators, ramps, modifications to cabinets.
- Chiropractic care.
- Closed-caption television decoder.
- Contact lenses.
- Cosmetic surgery necessary to ameliorate a deformity from a congenital abnormality, personal injury or disfiguring disease—not elective cosmetic surgery.
- Dental fees and dentures—not for cosmetic procedures, such as tooth whitening.
- Eye examinations.
- Health insurance premiums paid with after-tax dollars, including the cost of Medicare Part B and Part D coverage.
- Insulin and prescription drugs.
- Lodging (but not meals) not provided in a hospital while away from home primarily for, and essential to, medical care. Limited to $50 each per night for the patient and a companion.
- Nursing home care required because of a medical condition.
- Premiums paid for long-term-care insurance subject to limitations depending on the age of the taxpayer.
- Prescription contraceptives, legal abortions and vasectomies.
- Psychiatric treatment.
- Seeing aids for the blind, including expenses for Braille publications and guide dogs.
- Telephone equipment for the deaf.
- Weight-loss programs for the obese.
- Wheelchairs or other special chairs for a disabled person.
- As in the past, you cannot deduct federal income tax…FICA…or estate or gift tax, and you can deduct foreign taxes if you choose not to claim a foreign tax credit for them.
- In the past, if you itemized your deductions, you could claim an unlimited amount of personal state and local income and property taxes. What is new for 2018 is a limitation on the overall amount of state and local taxes (SALT)—real property taxes and state and local income or sales taxes—that can be deducted. The total for any combination of the above taxes is capped at $10,000 whether you are single or married filing jointly…or $5,000 for married people filing separately.
The general rules for deducting interest that you pay haven’t changed for 2018.
- So-called personal interest (paid on auto loans, credit card debt, etc.) is not deductible.
- Interest paid on qualified higher-education loans is deductible, subject to AGI and other limitations. The maximum deduction is $2,500 each year. Note: This is a deduction used in calculating your AGI and is not an itemized deduction.
- Investment interest—any interest paid on money you borrow to invest with—remains deductible as an itemized deduction to the extent of investment income.
New for 2018 are the rules for deducting interest on residence-related loans.
- For mortgages that started on December 15, 2017, or later, and are used to buy, build and/or substantially improve a principal or second residence, you can deduct interest on the loans up to $750,000, down from a $1 million cap in 2017.
- A deduction can no longer be taken for interest on a home equity loan or line of credit (HELOC), regardless of when the loan was taken, if the money is used for any other purpose than the ones above. That means if the money is used for purposes such as to consolidate debt, pay for a vacation or to make investments, a deduction is not allowed.
- There is also a transition rule. If you had a binding written contract in effect before December 15, 2017, this mortgage will be treated as falling under the old limit for interest deductions as long as the purchase closed before April 1, 2018.
- If you refinance an existing loan that was taken out before December 15, 2017, the former limits on interest deduction will apply.
Casualty and Theft Losses
- Starting with the 2018 tax year, no deduction can be taken for any theft loss for personal items. Casualty losses—damage, destruction or other loss of property from an unforeseen, sudden event—remain deductible only if they occur within a federally designated disaster area.
Contributions to qualified charities are deductible within limits based on your AGI. (You can carry over any nondeductible excess for up to five years.) AGI limits:
- Cash contributions are limited for 2018 to 60% of your AGI (up from 50% for 2017).
- Donations of capital gains property, such as appreciated stock, generally are limited to 30% of AGI.
The new law repealed the deduction for contributions entitling you to college athletic seating rights.
No deduction can be taken unless donations are itemized and substantiated, and substantiation rules haven’t changed…
- For any donation worth $250 or more, you need a written acknowledgment from the charity detailing the donation as well as bank records of the transaction (and bank or credit card records for smaller donations).
- For deductions of any donation worth more than $5,000 (other than publicly traded stock), you need an appraisal.
Until now, many miscellaneous expenses have been deductible to the extent they exceeded 2% of your AGI. On your 2018 return, no deduction can be taken for many of these expenses, including:
- Costs of job-related uniforms.
- Fees paid for professional journals.
- Investment management and custody fees for taxable investments.
- Unreimbursed employee expenses such as job hunting, education costs, home office expenses, and use of a vehicle for driving on company business.
- Legal expenses incurred for the production of income or the management, conservation or maintenance of income-producing property.
- Tax-return preparation fees.
- Union and professional dues.
- Hobby losses (which previously were deductible to the extent of income from a hobby).
However, some miscellaneous deductions can still be itemized. These include:
- Gambling losses, but only to the extent of cost of wagering, such as money spent on lottery tickets and the money you put in a slot machine, for example.
- Casualty and theft losses from income-producing property.
- Federal estate tax on income in respect of a decedent (items on which heirs must pay income tax, such as inherited IRAs and retirement benefits).
- Impairment-related work expenses for people with disabilities.
For 2018, there are some changes in deductions that are taken into account in figuring AGI.
- Alimony. For 2018, there are no changes. However, for divorce or separation agreements finalized after December 31, 2018, the payer of alimony cannot take a deduction for the alimony…and the recipient does not have to report alimony as income.
- Moving expenses. The cost of work-related moving is no longer deductible (other than for military personnel relocating under orders to a permanent station of duty).
The following deductions are unchanged:
- Educator costs for unreimbursed purchases of books, supplies, computer equipment and other materials for the classroom, up to $250 in 2018.
- IRA contributions up to $5,500, plus an additional $1,000 for anyone age 50 or older by year end (although the income limits on eligibility have changed). The basic IRA contribution is increasing to $6,000 in 2019.
- Deductions for self-employed persons for one-half of self-employment tax, health insurance and retirement plan contributions for themselves.
Perhaps the most dramatic change that individuals can claim on their personal income tax returns is the new Qualified Business Income (QBI) deduction. It reduces taxable income and can be used in addition to the standard deduction or itemized deductions. The deduction is up to 20% of certain business income, plus 20% of qualified REIT dividends and qualified publicly traded partnership income. The write-off applies to owners of pass-through entities, including partners, members of limited liability companies and shareholders in S corporations, as well as sole proprietors and independent contractors.
New Forms and Schedules
In addition to what you can and cannot deduct, the location on the return for write-offs has changed. While Schedule A is still used for itemized deductions, write-offs allowable in figuring adjusted gross income (e.g., IRA contributions, HSA contributions) are now reported on Schedule 1 of Form 1040.
Resources to help you prepare your tax returns:
IRS Publication 501, Exemptions, Standard Deduction, and Filing Information
IRS Publication 502, Medical and Dental Expenses
IRS Publication 526, Charitable Contributions
IRS Publication 529, Miscellaneous Deductions
IRS Publication 547, Casualties, Disasters, and Thefts
IRS Publication 936, Home Mortgage Interest Deduction
IRS Publication 970, Tax Benefits for Education
All the above publications are available through the IRS’s Web site, IRS.gov or by calling 800-TAX-FORM.