Itemized Deductions: 2017 and 2018 Returns

The Tax Cuts and Jobs Act of 2017 made a number of significant changes to various itemized deductions. Most of these changes affect 2018 returns (and in many cases, returns through 2025), but a few as noted below may apply for 2017 returns. The following is a brief comparison of itemized deductions for these two years so you’re clear on what’s deductible on 2017 returns and what may or may not be deductible starting next year.

1.      Medical and dental expenses

The adjusted gross income (AGI) threshold for deducting out-of-pocket medical costs has been changed for both 2017 and 2018 to 7.5%. You may recall that in 2016, only those who were 65 and older could use this threshold; younger taxpayers had a 10%-of-AGI threshold. Starting in 2019, all taxpayers, regardless of age, will have a 10%-of-AGI threshold unless Congress makes a change.

You can add the cost of long-term care insurance premiums to your deduction (subject to limitations based on age). Due to cost-of-living adjustments, the amount of premiums that can be taken into account in 2018 is slightly higher than in 2017.

2.      Taxes you paid

On 2017 returns, you can deduct all of your property taxes and all of your state and local income or sales taxes. However, on your 2018 return, you are limited to a total of $10,000 for all state and local taxes.

Those who prepaid property taxes for 2018 in 2017 can only deduct them on 2017 returns if the taxes were assessed; voluntary prepayments in 2017 are not deductible. For income tax prepayments in 2017 of state and local income taxes for a tax year beginning after 2017, the payment is treated as having been paid on the last day of the tax year for which such tax is imposed (i.e., 2018 even though paid in 2017).

3.      Interest you paid

For 2017, you can deduct interest on mortgages to buy, build, or substantially improve a principal residence or a second residence (“acquisition indebtedness”) up to $1 million ($500,000 for married persons filing separately). You can also deduct interest on home equity debt up to $100,000 ($50,000 for married persons filing separately).

For 2018, no deduction is allowed for interest on home equity borrowing (i.e., debt that is not “acquisition indebtedness”). And for acquisition indebtedness incurred after December 15, 2017, the limitation on the amount of debt that can be taken into account is $750,000 ($375,000 for married persons filing separately). If the acquisition indebtedness was incurred on or before December 15, 2017, the old $1million/$500,000 limit still applies. For those who refinance acquisition debt incurred on or before December 15, 2017, the old limits apply as long as the refinanced amount is not greater than the old indebtedness.

There is no change in the deduction for net investment interest; the same rules apply for 2017 and 2018 returns.

4.      Gifts to charity

In 2017, you can deduct cash contributions up to 50% of your adjusted gross income. For cash contributions to certain disaster relief, there’s no AGI limit. Different AGI limits apply for property contributions.

Starting in 2018, the limit on cash contributions increases to 60% of AGI; the percentages for property deductions haven’t changed. But no deduction is allowed for contributions entitling the donor to receive rights to purchase tickets or seating at college athletic events.

5.      Casualty and theft losses

On 2017 returns, you can deduct your losses for casualty and thefts that aren’t compensated by insurance or otherwise to the extent they exceed $100 per casualty or theft and the aggregate losses exceed 10% of adjusted gross income.

On 2018 returns, casualty and theft  losses will be deductible (subject to the $100 and 10% of AGI floors) only if they result from a federally-declared disaster.

6.      Job expenses and certain miscellaneous itemized deductions

For 2017, you may deduct these items to the extent that the total exceeds 2% of your adjusted gross income. This category of expenses includes tax preparation costs, unreimbursed employee business expenses, and hobby losses.

Starting in 2018, no deduction is allowed for itemized deductions subject to this 2% threshold.

 7.      Other miscellaneous itemized deductions

Certain specified miscellaneous itemized deductions are allowable without regard to the 2%-of-AGI threshold, such as impairment-related work expenses and gambling losses (but only up to winnings). This rule applies for 2017 as well as 2018.

8.      Total itemized deductions

On 2017 returns, high-income taxpayers may lose a portion of their otherwise allowable itemized deductions. More specifically, if your adjusted gross income in 2017 is more than $261,500 and you are single, or $313,800 if married filing jointly, the reduction in overall itemized deductions applies to most but not all deductions (for example, medical expenses are not subject to the reduction).

For 2018 returns, this reduction has been repealed.

Conclusion

Overall what do the changes mean for 2018? With the substantial increase in the standard deduction, many individuals who’ve routinely itemized may forego this option in favor of the higher standard deduction. Check with your tax advisor to see how you’ll fare under the new itemized deduction rules for 2018. And remember, most of the changes will sunset after 2025 unless Congress makes additional changes.