3 Lost Tax Deductions That Might Surprise You
As you’re doing your 2018 taxes, you'll see that deductions certainly aren't what they used to be.
The Tax Cuts and Jobs Act was the single largest tax reform legislation passed in the last 30 years. It changes tax laws that impact retirement planning, mortgages, corporation, partnerships, small-business owners and even state taxes to some degree.
While the TCJA was passed and signed into law on Dec. 22, 2017, 2018 was the first year it really hit home for personal income taxes. As you gear up to file your taxes before April 15, 2019, you might be surprised to find many popular tax deductions are either significantly smaller or eliminated altogether.
Let’s look at three popular tax deductions that are changing for your 2018 tax filing.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Mortgage Interest Deduction
While the tax code does not generally allow individuals to deduct personal interest expenses, there is an exception for your home mortgage interest. Prior to 2018, you could deduct interest paid on up to the first $1 million of a mortgage used to acquire or substantially improve your home. Additionally, you could deduct interest paid on the first $100,000 of a mortgage that was used for any other purpose — known as “home equity indebtedness” — like to pay off credit card debt, cash out equity or for college expenses.
Starting in 2018, you can no longer deduct home equity indebtedness interest. There is no grandfathering and really no way to change this debt. Even if you refinance home equity indebtedness into another mortgage, the non-deductibility follows it. The deductibility of the interest really does go to how you used the loan.
If your mortgage was used for anything other than substantially improving the property or purchasing the home, it is no longer deductible. Furthermore, new mortgages issued after Dec. 15, 2017*, that are treated as home acquisition indebtedness now have a cap on the interest deduction for interest paid on the first $750,000 of debt.
However, prior acquisition indebtedness mortgages are grandfathered in under the $1 million limit. Additionally, any mortgage interest deduction requires that the taxpayer itemize their deductions.
2. State and Local Tax Deduction (SALT)
Many states charge state income taxes. In the past, you could deduct almost any state or local income taxes paid from your federal taxes to help reduce your tax burden. However, the TCJA made significant changes to the deductibility of your state and local taxes.
Now, in 2018, filers are capped at $10,000 per year total for state and local income taxes, property taxes and sales taxes. Single filers have a maximum deduction of $10,000 for SALTs — and so do those married filing jointly!
The SALT deduction limit of $10,000 hits those in high income tax states the most — states like New York, New Jersey, California, Massachusetts and Connecticut.
Even if you live in a low-income tax state, you could lose a significant deduction if you have a lot of property. If you have big estates, lots of land or acres, you could see this tax deduction severely curtailed by the new cap. Just like with the mortgage interest deduction, you need to itemize to benefit from the deduction.
3. Charitable Contributions
While charitable contributions were not removed by the TCJA, far fewer Americans will be able to take advantage of them in 2018. In order to deduct charitable contributions, you need to itemize. The number of tax filers who will itemize for 2018 is expected to drop dramatically.
But this isn’t all bad news. One reason itemizing at the federal level is dropping in 2018 is due to both reduced deductions and standard deduction almost doubling. In 2018, the standard deduction for a single filer is $12,000 and for married filing jointly is $24,000 — nearly double the standard deduction in 2017.
As such, far fewer individuals will have itemized expenses taking them above the standard deduction, meaning many people will not be able to deduct their charitable contributions. Keep in mind that there are some strategies to maximize your tax deductions for your charitable contributions, including bunching contributions and donor advised funds.
Whether you end up paying more or less in taxes in 2018 really depends on your situation. If you relied heavily on these popular itemized tax deductions in the past, your taxes could go up. Overall, most people will end up seeing a slight decrease in taxes thanks to the increased standard deduction — even though we said goodbye to some big deductions.
*Note that there’s an exception/grandfather clause for mortgages where there’s a binding contract before Dec. 15, 2017, to close before Jan. 1, 2018, and the purchase is complete by April 1, 2018.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Jamie Hopkins is a well-recognized writer, speaker and thought leader in the area of retirement income planning. He serves as Director of Retirement Research at Carson Group and is a finance professor of practice at Creighton University's Heider College of Business. His most recent book, "Rewirement: Rewiring The Way You Think About Retirement," details the behavioral finance issues that hold people back from a more financially secure retirement.
-
Stock Market Today: Stocks Close Higher Ahead of Powell Speech
The main indexes kicked off the second half with a win thanks to solid gains in several mega-cap stocks.
By Karee Venema Published
-
Chewy Becomes the Latest Stock Pick of Roaring Kitty
Chewy stock is volatile Monday after Keith Gill, the investor known as Roaring Kitty, disclosed a 6.6% stake in the online pet retailer. Here's what you need to know.
By Joey Solitro Published
-
Should You or the Trust Pay a Trust's Income Taxes?
Irrevocable trusts can be set up so that the trust maker no longer pays income taxes, and the taxes are instead paid by the trust. What are the pros and cons?
By Rustin Diehl, JD, LLM Published
-
Developing a Charitable Giving Strategy: Where to Begin
Knowing what to give, how to give and where to give can help ensure your charitable giving aligns with your values and maximizes your impact.
By Nicole Jackson-Leslie, JD, 21/64 Certified Advisor Published
-
How to Score a Hole in One With Your Retirement Planning
The easy swing and follow-through of retirement planning starts with simple fundamentals. Start with your stance (aka your financial plan), choose the right club (aka asset allocation) and go from there.
By Evan T. Beach, CFP®, AWMA® Published
-
Is Your IRA an IOU to the IRS? Three Retirement Tax Strategies
These steps, including converting to Roth IRAs, using a Roth 401(k) and leveraging life insurance and annuities, can help reduce your taxes in retirement.
By William Decker, Investment Advisor Representative Published
-
Are You a DIY Retirement Planner? Four Things You Need to Know
While saving is a huge part of retirement planning, tax efficiency and estate planning can be just as important, especially once you actually retire.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Annuities and Tax Planning Boost Retirement Income and More
Smart planning takes advantage of the tax benefits of lifetime income protection through annuities. But wait — there’s more.
By Jerry Golden, Investment Adviser Representative Published
-
Benefits of Charitable Contributions You May Be Overlooking
There are many tax, estate and income benefits when you donate to charity, especially if you make use of a charitable remainder trust (CRT).
By Joel V. Russo, LUTCF Published
-
Cost Segregation: Six Real Estate Businesses That Can Benefit
By conducting a cost segregation analysis, property owners and others could find building components that could be depreciated, leading to tax savings.
By Derek A. Miser, Investment Adviser Published