Tax Deductions That Went Away After the Tax Cuts and Jobs Act

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Tax Deductions That Went Away After the Tax Cuts and Jobs Act

In 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TJCA). The measure roughly raised the basic deduction while eliminating or restricting numerous itemized deductions. Because of the tax change, many taxpayers who used to itemize on Schedule A instead accepted the basic deduction. The following is a list of exemptions, deductions, and credits that were removed, restricted, decreased, or altered as a result of the TCJA’s passing.

Key Takeaways:

  • Many deductions, credits, and restrictions, including the basic deduction, were removed or reduced by the Tax Cuts and Jobs Act until December 31, 2025.
  • Personal and dependent exemptions are no longer available, although the Child Tax Credit is still available.
  • Moving fees and alimony have been eliminated, but mortgage interest and state and local taxes have been limited.
  • Investing, tax preparation, and hobbies are examples of key costs that are no longer deductible.
  • Gambling costs are deductible, and the charity deduction level has been raised.

Exemptions and Credits

Exemptions and deductions lower the amount of taxable income claimed on your yearly tax return. Tax credits are deducted from the taxes owed. The TCJA had an influence on all three of these aspects, and each has a distinct effect on the amount you pay.

Assume you’re a single taxpayer with a taxable income of $100,000. This puts you in the 24% tax bracket. Using the Internal Revenue Service’s (IRS) tax calculation worksheet, you owe $18,021 for 2021. A $10,000 deduction (or exemption) reduces your income to $90,000, resulting in a $15,627 tax obligation. With a $10,000 tax credit, your AGI remains $100,000, but your taxes are just $8,021—the amount obtained by deducting $10,000 from $18,021.

Personal Exemptions

Between 2018 and 2025, the new legislation suspends personal and dependant exemptions. Though not technically a deduction, an exemption works in the same manner by enabling you to decrease your taxable income by the amount of the exemption. Assume the exemption is $4,050 for yourself and each dependant you claim. It is now zero. However, keep in mind that even if you are unable to claim a personal or dependent exemption, you may be eligible for other tax advantages.

Child Tax Credit

The TCJA increased the child tax credit (CTC) from $1,000 to $2,000 for those who qualified, including higher-income parents. For the 2021 tax year, the ceiling was raised to $3,000 for children aged six to seventeen, and $3,600 for children under the age of five. For 2021, the income limitations are $200,000 for single parents and $400,000 for married couples filing jointly.

The child tax credit is refundable, which means that even if you don’t owe taxes owing to low income, you may still get a portion of the credit, resulting in (or increasing) your refund. Remember, this is a tax credit, therefore it is deducted from the total amount of taxes owed. A new $500 tax credit is now available for dependents aged 17 and above.

The tax benefit for children is now entirely refundable. Previously, only $1,400 of the credit could be refunded. These modifications are part of the American Rescue Plan Act of 2021 and will be in effect only for the fiscal year 2021, unless extended by an additional act of Congress. It is phased away for individuals earning more over $75,000 and couples earning more than $150,000.

Higher Standard Deduction

The Tax Cuts and Jobs Act increased the standard deduction for taxpayers. In 2021 and 2022, single filers may take a standard deduction of $12,550 and $12,950, respectively. The deduction for married couples filing jointly is $25,100 in 2021 and $25,900 in 2022. These charges are approximately twice what they were before to the TCJA.

People over the age of 65 and those who are blind enjoy larger standard deductions under the federal income tax system and in several states. If you are blind, 65 or older, and single, your standard deduction will increase by $1,700 in 2021 and $1,750 in 2022, according to government standards. If you file jointly and one of you is 65 or older, your standard deduction will increase by $1,350 in 2021 and $1,400 in 2022.

  Tax Advisor Definition

Even if you deduct mortgage interest, you may find that the new standard deduction is more than the sum of your itemized deductions, regardless of your age. The following examines how Schedule A itemized deductions have altered as a result of the TCJA. There are also some ideas about what to do instead in certain circumstances.

87%

For tax year 2018, the projected proportion of filers who used the standard deduction rather than itemizing.

Commuter Tax Benefits

Previously, your company could pay you for bicycle commuting expenditures up to $20 per month, or $240 per year, tax-free. Furthermore, your employer may be able to deduct the cost of providing the benefit. Both bike commuters and their employers lost this perk as a result of the TCJA. It also eliminated employer deductions for parking, public transportation, and carpooling.

Commuting Expenses

Employers will continue to deduct commuting expenditures deemed “essential for safeguarding the employee’s safety,” but the TCJA does not specify which expenses qualify, and the IRS has provided no actual advice to far.

Employees continue to get tax-free benefits from their employers for parking, public transportation, and carpooling. The monthly exclusion amounts are $270 in 2021 and $280 in 2022.

However, since businesses no longer get a tax break for providing the benefit, most have little motivation to do so. Your company may also provide bicycle commuting rewards in any amount, which are tax deductible.

Moving Expenses Deduction

The costs of moving for a new job used to be deductible as an above-the-line deduction on Form 1040, which you could remove from your gross income to determine your adjusted gross income (AGI).Unfortunately, this is no longer the case. In reality, the distance traveled is irrelevant. Moving expenditures are not tax deductible. The only exception is if you are on active duty and relocating for a military-related purpose. The deduction still applies in this scenario.

Alimony Deduction

Previously, the individual paying alimony enjoyed an above-the-line deduction, while the person receiving alimony had to report the money as taxable income. For any divorce that happened after December 31, 2018, the paying spouse no longer obtains a deduction, and the receiving spouse no longer reports the payments as taxable income. Payments made before to 2019 are unaffected. Child support payments are likewise not tax deductible for the paying spouse but are tax-free for the receiver.

Gift an IRA

Giving the receiving spouse a lump-sum individual retirement account is one strategy proposed for the paying spouse (IRA).This essentially gives a deduction to the paying spouse since they are giving away money that they would have had to pay taxes on later.

The receiving spouse would be liable for taxes upon withdrawal (including a 10% penalty if funds are removed before the age of 5912) but would benefit from tax-free growth until the funds were withdrawn. The IRA account transfer is tax-free.

Obviously, this is not ideal if the receiving spouse needs funds immediately.

Medical Expenses Deduction

The medical cost deduction is still available. On Schedule A for 2021, you may deduct unreimbursed medical costs that exceed 7.5% of your AGI. This deduction was set to return to a 10% AGI barrier unless a bill was enacted on December 20, 2019. Lines 1-4 of Schedule A are used to claim the deduction.

Remember that the medical costs must be qualifying deductible. The majority of cosmetic operations do not qualify.

SALT Taxes Deduction

The deduction for state and local taxes (SALT) on Schedule A used to be limitless. Income taxes (or general sales taxes), real estate taxes, and personal property taxes are examples of these. The SALT deduction is now restricted to $10,000 under the TCJA ($5,000 if married filing separately).

This may be a significant issue for residents of states with high income or property taxes, such as New York and California.

States Fight Back

Some governments attempted to compensate for the limit by enabling people to donate to a state charity fund instead of paying taxes. On federal tax returns, the amounts might then be deducted as charitable donations. However, in June 2019, the Treasury Department and the Internal Revenue Service released final rules prohibiting the practice.

  Energy Tax Definition

Four states filed a separate constitutional challenge to the SALT limit. These attempts were likewise futile when the complaint was rejected by a federal court in September 2019.

The Employer Compensation Expense Tax, a voluntary employer-side tax aimed to produce a tax credit for employees, was implemented in New York as a workaround. The move takes advantage of the fact that firms may deduct state and local taxes indefinitely. 311 employers engaged in the program for the 2020 tax year.

Connecticut passed the Pass-Through Entity Tax Credit, which imposes a tax on pass-through businesses while simultaneously granting a tax credit to the organizations’ partners.

Foreign Property Taxes

The deduction for foreign taxes paid on real estate is eliminated under the TCJA. Previously, you could deduct overseas property taxes on Schedule A in the same way that you did in the US, whether for a primary house or a second home.

Qualified Housing Expense

Foreign property taxes are now deductible on Form 2555, Foreign Earned Income, for the purposes of the foreign housing exclusion for certain U.S. citizens or residents who live outside the United States and earn earnings overseas. Rent, utilities (other than phone rates), residential parking, furniture leasing, and other things are all considered qualified housing expenditures.

This deduction is based on a legal interpretation. Do not attempt it without first contacting a knowledgeable tax professional.

Mortgage Interest Deduction

Previously, you could deduct interest on up to $1 million in home debt ($500,000 for married taxpayers filing separately). This continues to apply to any loan established on or before December 16, 2017. However, if you issue a new mortgage after that date, the new $750,000 maximum applies ($375,000 if married and filing separately).

Because the mortgage interest deduction is only available if you file Schedule A and itemize, the change has no effect on individuals who take the standard deduction.

HELOC Interest Deduction

Previously, you could deduct interest on a home equity loan and a home equity line of credit (HELOC) just as you could on a mortgage, regardless of how the money was utilized. This deduction is no longer valid, at least in part. Since 2018, you cannot deduct interest on these sorts of loans unless specific conditions are met, even if you obtained the loan prior to that year.

HELOC Interest

If you have or get a home equity loan or line of credit and use the funds to purchase, construct, or significantly modify your primary or secondary residence, the interest may still be deductible.

To qualify for the deduction, the home equity loan must be secured by the property you are remodeling. You can’t use your city flat as collateral for a home equity loan to fix up your ski property. You may also refinance an existing mortgage and deduct the interest if the refinanced amount is less than the original loan balance (in other words, provided you are not taking any cash out).

Mortgage Insurance Deduction

The Schedule A deduction for mortgage insurance premiums/private mortgage insurance (MIP/PMI) terminated at the end of 2017, despite the fact that it has nothing to do with the TCJA. However, a bill passed into law on December 20, 2019, extended the deduction through 2020. The deduction is claimed on Schedule A, Line 8d.

Casualty, Theft Deduction

Following the passing of the TCJA, the comprehensive Schedule A deduction for casualty and theft losses was repealed. Previously, you may deduct losses from a catastrophe or theft to the extent that they were not covered by insurance or disaster aid.

If you reside in a federally designated disaster zone, you may still claim the deduction. These designations are often established county by county, so even if the county next to you has been named a federal disaster region, your county may not be.

Miscellaneous Itemized Deductions

Schedule Miscellaneous Itemized deductions subject to a 2% AGI threshold were eliminated in 2018. Deductions in the following categories are included:

  • Unreimbursed Workplace Expenses Travel, transportation, and meals, union and professional dues, business liability insurance, depreciation on office equipment, work-related education, home office expenses, costs of looking for a new job, legal fees, work clothes, and uniforms are examples of work-related expenses you paid out of your own pocket. These are all gone. Your best option is to request reimbursement from your employer for these charges. The payment will be tax-free. You may potentially request a wage increase, but this would be taxed.
  • Investment costs. These include costs for financial advice or management, tax or legal guidance, trustee fees (for managing IRAs or other accounts), or safe deposit box rental fees. Although the goods listed above are no longer deductible, if you borrow money to purchase an investment, the interest on that loan (referred to as investment interest) is deductible if you itemize. The deduction is restricted to your total taxable investment income for the year.
  • Fees for Tax Preparation These expenses include the cost of tax preparation software, the services of a tax expert, and the purchase of tax periodicals. Deductions for electronic filing expenses and fees used to challenge the IRS, such as legal fees, accounting fees, or fees paid to appeal a judgment or demand a refund, are also gone. Ask for a separate charge if you employ someone to prepare both your personal and corporate taxes. Fees paid to have your company return prepared are entirely deductible as a business cost.
  • Expenses for a hobby. These costs, up to the amount of revenue you made each year, are no longer deductible, despite the fact that you must disclose (and pay taxes on) any money received from your pastime. When determining hobby-related revenue, you may deduct the cost of things linked to your pastime that you sell to clients.
  Windfall Tax Definition

Itemized Deductions Still Available

A few miscellaneous itemized deductions remain after 2018:

  • Under the TCJA, gambling losses are still deductible up to the amount of your earnings for the year. The 2% restriction on miscellaneous itemized deductions does not apply to gambling losses.
  • Even if you don’t itemize deductions, interest on student loans is still tax-deductible ($2,500 or the amount of interest paid during the year, whichever is less).
  • Even if the teacher does not itemize, the $250 classroom teacher deduction remains in force and accessible.
  • The regular mileage rate deduction for members of the Armed Forces was 16 cents per mile in 2021 and 18 cents per mile in 2022. For 2021 and 2022, the charitable rate was 14 cents.

Note to Teachers

Teachers may still deduct up to $250 in unreimbursed educational expenditures each year. Furthermore, according to updated IRS guidelines, these costs may include COVID-19 protection products acquired after March 12, 2020.

Improving Deductions

Along with the higher standard deduction, the TCJA improves numerous additional provisions.

  • In 2021, the estate tax exemption is $11.7 million, rising to $12.06 million in 2022.
  • Since 2018, student loan debt discharge due to death or incapacity has not been taxed. Previously, debt that was forgiven due to incapacity or death was taxable to you or your estate.
  • The TCJA imposes no restrictions on itemized AGI deductions, although additional limitations may apply depending on the deduction.
  • Higher limit levels are now available for charitable donations. Most cash or check gifts may be up to 60% of your AGI, up from 50% before.

The Bottom Line

The effect of deductions removed by the TCJA or other changes on you is determined on your own financial status as well as the kinds and amounts of deductions you may be allowed to claim. It’s worth noting that the improvements made possible by this law are due to expire on December 31, 2025, unless Congress votes to prolong them. More information is available in the IRS booklet Tax Reform: Basics for Individuals and Families.

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