How did tax reform change itemized deductions?
Editor’s Note: This article was originally published on December 22, 2017, and updated for accuracy in 2020.
If you’re used to claiming itemized deductions, tax reform may have a surprise in store for you and how you file your taxes. To get you up-to-date and help you understand how you might be affected, we provide a brief overview of how tax reform affected itemized deductions.
The ability to itemize deductions allows taxpayers to reduce their taxable income by claiming a variety of deductions instead of the standard deduction. These include mortgage interest, state and local income or sales taxes, property taxes on their homes and cars, charitable contributions, and more. Traditionally, about 30% of taxpayers have itemized deductions (on Schedule A) because their total itemized deductions were more than the standard deduction, based on their filing status.
However, tax reform eliminated or restricted many itemized deductions and raised the standard deduction. That means fewer taxpayers are likely to itemize.
Itemized deductions 2019 and prior
Prior to tax reform, taxpayers were subject to an itemized deduction phase out or limit (often called the Pease limit), which applied to certain deductions including those for home mortgage interest, state and local taxes, and charitable contributions. In 2018, this limit was eliminated. This tax deduction change also applies to 2019.
Post-Tax reform: Other 2019 tax deduction changes
Here’s how tax reform changed itemized deductions and altered the greater tax landscape.
Capping the State and Local Tax deduction: Less SALT
Your doctor may have recommended a restricted salt diet, and so has Congress. After tax reform, the deduction for all state and local taxes combined cannot exceed $10,000. The taxes include state and local income or sales taxes, real estate taxes, and personal property taxes. Taxpayers in high-tax states may see much of their SALT deduction reduced, and limiting this one deduction could mean itemizing won’t make sense for many taxpayers. The impact of the limit on any one taxpayer depends on their specific situation.
Mortgage and home equity loan interest
The cost of buying or owning a home has traditionally been made more affordable by the deductibility of mortgage interest and real estate taxes. Although real estate taxes are included in the $10,000 limit for all state and local taxes, mortgage interest remains deductible – with two important changes.
Now, for new mortgages taken out, only the interest on the first $750,000 of mortgage acquisition debt is deductible. This may not be a factor where housing prices are relatively low and mortgages are below this limit. However, a mortgage this size is common in locations with high residential real estate costs. Also, interest on home equity debt is no longer deductible. This affects interest on all home equity loans used for purposes other than to improve the current home.
So, if you take out home acquisition debt of less than $750,000, you won’t lose any of your interest deduction. Of course, if for other reasons you can’t itemize, your otherwise deductible mortgage interest will have no effect on reducing your federal tax.
Charitable contributions survive – and thrive
Tax reform enhanced the deduction for charitable contributions by raising the contribution limit in any one year. The limit is now 60% of adjusted gross income, up from 50%.
If you can still itemize, you can continue to deduct charitable contributions, but doing so only reduces your taxes if all your itemized deductions exceed the newly raised standard deduction.
Some taxpayers who have lost the value of some deductions (such as the state and local tax deduction) can make up the difference by contributing more to their favorite charity so they can continue to claim itemized deductions.
Other itemized deductions
The medical expense deduction also has been changed under tax reform. Under prior tax law, taxpayers whose unreimbursed medical expenses exceeded 10% of their adjusted gross income (AGI) could deduct that excess. Now, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their AGI.
SALT, mortgage interest, and charitable contributions are among the most widely claimed deductions, but the list of itemized deductions allowable was previously more extensive. Now itemized deductions for unreimbursed employee expenses, tax preparation fees and other miscellaneous deductions are eliminated. Also gone is the deduction for theft and personal casualty losses, although certain casualty losses in federally declared disaster areas may still be claimed.
For taxpayers who used to claim itemized deductions, it may no longer make sense after tax reform if the new higher standard deduction exceeds what their itemized deductions would have been.
With a new, higher standard deduction, these taxpayers can deduct more using the standard deduction than by itemizing.
2019 Tax deductions: Changes to itemized deductions aren’t the only tax reform updates to consider
Itemizing versus claiming the standard deduction is only one comparison the taxpayer should make. Tax returns have many moving parts, and while some taxpayers benefit from a higher standard deduction, they will need to consider other aspects of their returns.
Navigating 2019 tax deductions
Each taxpayer’s situation is slightly different. If you’re curious to find out the outcome for your unique tax situation, make an appointment to visit with a tax professional. H&R Block’s tax experts will help you navigate your tax obligation and find all the tax credits and deductions you are entitled to.
Learn more about notice CP05, why you received it, and how to handle an IRS CP05 notice with help from the tax experts at H&R Block.
Get the facts from H&R Block about IRS penalty relief due to reasonable cause. Learn how the IRS will examine your reasons for failing to file or pay.
Learn more about notice CP297A, your appeal rights, and how to handle an IRS tax bill with help from the tax experts at H&R Block.
If you did not have health care coverage, you may need to calculate your shared responsibility payment when filing your return. Learn more from H&R Block.