As you have probably heard by now, in December Congress finally passed a sweeping reform to our income tax system. While many of the bill’s effects remain to be fully realized, we do know one thing: The reforms simplified the income tax code somewhat, reducing or eliminating many common deductions.
For about 70 percent of American taxpayers, the loss of certain deductions is of little consequence. They take the standard deduction anyway (which has been essentially doubled, depending upon filing status). However, for those who itemize their returns (as many of our clients do), the changes to deductions could make a much larger difference in their taxes due.
So, which deductions got the axe? And which ones are subject to new limits?
Local and state taxes. Previously, you could deduct local and state taxes, such as property taxes, sales taxes, and state income taxes. This allowance was a boon for those living in high-tax states. Now this deduction will be limited to $10,000. This might affect those of you with high property tax bills, just as an example.
Mortgage interest deduction. You can still deduct interest on your mortgage, but it will be limited to the interest on a $750,000 mortgage or below ($375,000 for married taxpayers filing separately). The deduction can’t be taken for mortgage interest paid on a second home, nor can it be used for home equity lines of credit.
Charitable giving. You can still claim a deduction for gifts given to qualified charities. With standard deductions essentially doubled, fewer taxpayers are expected to file itemized returns, which could theoretically remove the incentive to give to charity. However, if you still plan to itemize your tax returns, rest assured that the charitable gifts deduction remains available to you.
Miscellaneous deductions. Many smaller deductions are eliminated completely, such as deductions for tax preparation or investment fees. Other changes might apply to your particular situation. We urge you to continue working with your tax professional to learn more about how the new tax bill will affect you.