Tax Reform Changes to Exemptions and Deductions

tax reform changes

The Tax Cuts and Jobs Act (TCJA) created a lot of buzz last year as experts pored over the tax reform changes to understand what it all meant. As you think about filing your taxes, you might be looking to brush up on the new law.

One area of taxes greatly affected by the TCJA changes are tax deductions and exemptions–two levers often used to lower your taxable income. In some cases, the new law restricts some provisions, while in others it completely eliminates the tax breaks.  

To get an idea of how these changes might affect your return, review this list of tax deduction and exemption updates for 2018.

List of Tax Deduction Changes for 2018

First, let’s talk about deductions and review a couple of basics. When you start your taxes, you’ll go down one of two paths: either taking the standard deduction or itemizing your deductions.

The standard deduction essentially lets you reduce your taxable income with one lump sum amount. On the other hand, with itemized deductions you add several different deductions together and deduct the total from your taxable income.  

Is it better to take the standard deduction or itemize? That depends. If your itemized total is more than the standard deduction amount, then itemizing is the way to go. But, how have the tax reform changes affected these decisions?

Standard Tax Deduction Changes

With the TCJA, standard deductions have not just increased, they’ve nearly doubled for each tax filing status. See the difference in the amounts here.  

Before tax reform, the standard deductions for 2018 would have been (upon being indexed to inflation):

  • $13,000 – Married Filing Joint or Surviving Spouse

  • $9,550 – Head of Household

  • $6,500 – Married Filing Separate or Single filer

With tax reform, for years 2018-2025, the standard deduction amounts will be:

  • $24,000 for Married Filing Joint or Surviving Spouse

  • $18,000 for Head of Household

  • $12,000 for Married Filing Separate or Single filer

Itemized Tax Deduction Changes

Looking at the itemized tax deductions changes for 2018, you’ll find limitations to some provisions and that others are gone altogether. Check out each deduction to find out what’s changed with tax reform. Note: Each of these changes will revert back to prior law after the 2025 tax year.   

  • State and local taxes: You can now only deduct up to $10,000 of your combined state and local taxes. This includes local income or sales taxes, personal property taxes, and real estate taxes.

  • Mortgage and home equity loan interest: The cap for mortgage interest deductions has been reduced for new loans taken out after 12/15/2017. Now, homeowners can only deduct interest on a mortgage up to $750,000 ($375,000 for married taxpayers filing separately). Also, home equity loan interest is no longer deductible after 2017 unless it’s used to buy, build, or substantially improve your primary residence.

  • Charitable contributions: This is one instance where a provision has been expanded versus restricted as Congress has increased the limit of what can be deducted in a given tax year. The new rules allow you to deduct your charitable contribution up to 60% of your Adjusted Gross Income (AGI). Previously, this limit was 50% of your AGI.

  • Unreimbursed employee expenses: If you had certain unreimbursed expenses for work, such as meals or travel (including mileage), you would have been able to offset those costs on your taxes. Now, this type of deduction has been completely eliminated. You should note this change does not apply to expenses for self-employed individuals (for example, if you’re filing Schedule C or Schedule F).

  • Moving expenses – Before the tax reform, you could have deducted the reasonable costs of moving your things and your own travel costs associated with a job change. After the TJCA, this deduction is gone, unless you are a member of the military who is on active duty and moving as part of a military order.

  • Theft and personal casualty losses – Previously, if you experienced loss due to theft, fire, or other natural disaster (think hurricane or earthquake), you could have claimed the loss on your return. Now, only losses incurred in a federally declared disaster area can be claimed as a deduction.

  • Medical expenses – If you have unreimbursed medical expenses, you can deduct those costs that exceed your AGI over a certain threshold. For 2018, that limit is 7.5%. After the 2018 tax year, the threshold returns to 10% of AGI.

Tax Exemption Changes

Similar to deductions, exemptions allowed you to lower your taxable income. Exemptions, under the old tax code, were available for yourself, your spouse, and any qualifying dependents. With the tax reform changes, exemptions are a thing of the past.

While this removal may feel like a negative, it’s important to remember the sharp increases to the standard deduction discussed above. That said, you might be wondering if the increase in standard deductions outweigh the removal of exemptions. Again, it depends.

Let’s look at an example. Say you are a delivery driver with an Adjusted Gross Income (AGI) of $50,000 filing as “Married Filing Jointly.”

In Scenario 1, you have no dependents.

  • In 2017, your taxable income would be $50,000 - $12,700 - $4,050 (2) = $29,200

  • In 2018, your taxable income would be $50,000 - $24,000 = $26,000

  • Your taxable income was reduced by $3,200!

In Scenario 2, you have one dependent:

  • In 2017, your taxable income would be $50,000 - $12,700 - $4,050 (3) = $25,150

  • In 2018, your taxable income would be $50,000 - $24,000 = $26,000

  • Your taxable income increased by $850.

Of course, these are just a couple variations on one scenario. Your own bottom line will be based on your personal situation.

See How the TCJA Changes Affect You

Want to get an estimate for your 2018 taxes? Use H&R Block’s tax calculator to determine how much you might owe or what your refund could be.

As part of our partnership with H&R Block, Mike Slack, JD, EA and senior tax research analyst at The Tax Institute at H&R Block will be providing insight on various topics throughout tax season.

Mike SlackComment