Summary of Itemized Deductions on the Federal Return

On December 22, 2017, President Donald Trump signed the Tax Cuts & Jobs Act into law, changing the entire U.S. tax landscape. A major component of the act affecting individual taxpayers is the new treatment of itemized deductions.

With so many changes to the limits and deductibility of certain expenses, many individual taxpayers may find they will not be itemizing in future tax years.

Highlights of the Changes to Itemized Deductions

Medical Expenses

Pre-Reform Law vs Tax Cuts & Jobs Act
Limited to amount exceeding 10% of AGI (7.5% of Adjusted Gross Income (AGI) for taxpayers over the age of 65). For tax years beginning after 12/31/16 and ending before 01/01/2019, the deduction is limited to amounts exceeding 7.5% of AGI for all taxpayers.

For Alternative Minimum Tax (AMT) purposes, same 10% of AGI limit. For AMT purposes, 10% limit rule no longer applies.
Taxpayers 65 or older can deduct the lesser of the deductible amount on Sch. A or 2.5% of AGI.

State & Local Taxes

Pre-Reform Law /Tax Cuts & Jobs Act
Taxpayers can deduct state & local income and property taxes paid, or state & local sales tax paid instead of income tax paid. For tax years beginning after 12/31/17 and ending before 01/01/2026, individuals can deduct state & local sales, income or property taxes up to $10,000 ($5,000 if married filing separate (MFS)). *See additional information below.
Foreign real property taxes not related to a trade or business activity are not deductible.

Mortgage Interest

Pre-Reform Law vs Tax Cuts & Jobs Act
Interest paid on a mortgage secured by a principal or second residence is deductible on mortgage loans up to $1 million ($500,000 MFS) of acquisition indebtedness and $100,000 in home equity indebtedness. For tax years beginning after 12/31/17 and ending before 01/01/2026, the underlying mortgage indebtedness limit is lowered to $750,000 ($375,000 MFS) on loans incurred after 12/15/2017. *See additional information below.
For AMT purposes, the home equity deduction is disallowed. There is no longer a deduction permitted related to interest paid for home equity loans.

Charitable Contribution

Pre-Reform Law vs Tax Cuts & Jobs Act
Contribution deductions are limited, depending on the type of charitable organization and type and purpose of the contribution, to 50%, 30% or 20% of AGI. For tax years beginning after 12/31/17 and ending before 01/01/2026, the 50% AGI limit for cash contributions to public charities and certain private foundations has been raised to 60% of AGI. Any amount exceeding the 60% AGI limit will be carried-forward for up to 5 years.
Contributions of $250 or more need contemporaneous written acknowledgments from the donee organization, unless the donee organization files a return reporting the donation. The exception to the requirement for contemporaneous written acknowledgments has been repealed for tax years beginning after 12/31/2016.

Amounts Paid to Higher Education Institutions in Exchange for Rights to Purchase Tickets to an Athletic Event

Pre-Reform Law vs Tax Cuts & Jobs Act
80% of certain payments to institutions of higher education in exchange for rights to purchase event tickets are deductible as charitable contributions. For tax years beginning after 12/31/17, no charitable deduction is allowed for such payments.

Casualty and Theft Losses

Pre-Reform Law vs Tax Cuts & Jobs Act
Personal losses not connected with trade or business activity or any activity entered into for profit, such as property losses from fire, theft or other casualty, can be claimed as an itemized deduction. For tax years beginning after 12/31/17 and ending before 01/01/2026, personal casualty losses are limited to losses incurred due to federally declared disasters.

Miscellaneous Itemized Deductions (Subject to 2% floor)

Pre-Reform Law Tax Cuts & Jobs Act
Certain expenses such as tax preparation fees, investment broker fees, and others are deductible to the extent the aggregate exceeds 2% of AGI. For tax years beginning after 12/31/17 and ending before 01/01/2026, all miscellaneous itemized deductions are suspended.
State & Local Tax Deduction

If you thought you were being smart by prepaying your taxes by 12/31/17, guess again. The act specifically declares that state & local income taxes paid by 12/31/17 pertaining to tax years beginning after 12/31/17 will not be treated as deductions for the 2017 tax year. The IRS also announced that only property taxes already assessed by local governments for later tax years can be taken as deductions if prepaid in 2017. Taxpayers in high income and property tax states such as California and New York will feel the greatest impact from this change.

State, local, and foreign property taxes and state & local sales taxes related to carrying on a trade or business activity are deductible when paid or accrued. Individual state and local income, war profits, and excess profits taxes are nondeductible.

Mortgage Interest

If a binding written contract entered before 12/15/2017, to close on the purchase of a principal residence before 01/01/2018, and the residence is purchased before 04/01/2018, the indebtedness will be considered to be incurred before 12/15/2017 (subject to the $1 million limit).

Refinancing of qualified residence indebtedness incurred before 12/15/2017 will continue to be subject to the $1 million ($500,000 MFS) limitation so long as the resulting debt does not exceed the original indebtedness.

Further Changes to Note

In addition to the deduction-specific changes listed above, the act has suspended the “Pease Limitation” for tax years beginning after 12/31/17 and ending before 01/01/2026. This limitation affected high-income taxpayers by reducing their allowable itemized deductions by 3% of their AGI exceeding the threshold.

The majority, if not all, of these changes becomes effective for tax years beginning after 12/31/2017.