The Tax Cuts and Jobs Act (TCJA) made significant alterations to the IRS tax code that have likely affected you and your clients since they took effect in tax year 2018. Several of the key changes affected itemized deductions. We have gathered some notable modifications you need to be aware of that will have lasting effects in this article.
Several tax breaks increased
The TCJA increased the standard deduction as well as other frequently used tax deductions.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax was enacted to ensure high-earning taxpayers contribute their fair share for income tax. Before the new tax reform, it had one major flaw: inflation. AMT was never updated for inflation, which meant more middle-class taxpayers were being subjected to AMT. From the 2018 tax year and onward, AMT exemptions will be automatically updated for inflation. Also, the AMT exemption amounts have significantly increased. These changes ultimately mean few taxpayers – particularly middle-class ones – will pay the AMT.
The standard deduction
The TCJA doubled the standard deduction in tax year 2018, and it will continue to increase incrementally until 2022. Below are the standard deduction amounts for 2020.
|Filing status||Deduction amount for tax year 2020|
|Married Filing Separately||$12,400|
|Married Filing Jointly (and Qualifying Widow/ers with Dependent)||$24,800|
|Head of Household||$18,650|
For your clients who are age 65+ or blind, the standard deduction is worth an additional $1,300 ($1,650 for unmarried taxpayers).
Medical and dental expenses
Beginning Jan. 1, 2019, your clients can deduct unreimbursed medical and dental expenses exceeding 10% of their AGI. If you are filing a client’s taxes for tax year 2018, they can deduct unreimbursed medical and dental expenses that exceed 7.5% of their AGI.
Some tax breaks are now restricted
The TCJA placed new requirements on several existing deductions.
State and local tax deduction (SALT)
If your clients live in a state that imposes a sales, income, property or real estate tax, the IRS will allow them to deduct those amounts on their federal income tax return to lower their tax bill. Before the tax laws changed, there was no limit to how much taxpayers could deduct for state and local taxes (SALT). Beginning in tax year 2018, the deduction has been capped at $10,000 for all state and local income, property, and sales taxes combined.
Note: Clients who use their home or part of their home for work can still take a business deduction for their property, even if it means they exceed the $10,000 limit.
Which clients will be most affected by the changes to SALT?
This tax law change does not directly affect everyone. The new SALT restriction specifically affects your clients who itemize their deductions on their tax return.
The new limit will have the most significant impact on taxpayers living in states with high income and property tax like California, New York, New Jersey, New Hampshire, Connecticut, and Oregon.
The $10,000 cap applies to most filing statuses. Married couples, consequently, will feel the impact more than singles. For instance, your clients who file as single can deduct up to the full $10,000 amount, but for clients who are married filing jointly, the maximum allowed is still $10,000 per return. Even if a client and spouse file separately, they can only deduct up to $5,000 each, for a total of $10,000.
For more information about changes to the SALT deduction, visit our support center.
Home mortgage interest
Your clients can still deduct interest on mortgage indebtedness up to $750,000 ($375,000 for married filing separately) for mortgages taken out after December 16, 2017. For mortgages taken out on or before that date, the limit is $1,000,000 ($500,000 for married filing separately).
Home equity loan interest
Interest on debt related to the purchase, construction, or significant improvement of your client’s residence is still deductible. You can also help your client deduct refinanced mortgages if the amount is not more than what they paid for the home. If the money is used for any other reason, your client can’t deduct the interest.
Certain tax deductions are no longer available
One of the main objectives of the TCJA was to simplify the tax code, which means some deductions were eliminated.
Causality and theft losses
Before tax reform, you were able to deduct the value of stolen items from a home burglary. Under the TCJA, this deduction now only allows you to write off losses associated with federally declared disasters.
If your client’s divorce was finalized on or after Jan. 1, 2019, they can no longer deduct alimony payments from their taxable income. This also applies if the alimony agreement was modified on or after this date. If your client is receiving alimony, it should not be reported as part of their taxable income.
The personal exemption
The TCJA eliminated the personal exemption as of Jan. 1, 2018. Your clients will no longer be able to take an exemption for themselves or their dependents.
Shared Responsibility Payment
As of 2019, if your clients don’t have health insurance coverage, they won’t face a penalty on their federal tax return. However, some states have health insurance mandates that might charge your clients with a fee on their state tax return.
Your clients can no longer deduct the cost of moving their belongings or travel costs resulting from a move. However, active-duty military moving on orders can still deduct any unreimbursed expenses under the TCJA.
Foreign real estate tax deduction
Under the new tax plan, the foreign property tax deduction has been eliminated. If your clients own a vacation home or part-time residence outside the U.S., they will not be able to deduct their foreign real estate taxes.
Unreimbursed employee expenses
Prior to the TCJA, job-related expenses that were not reimbursed by your client’s employer and that exceeded 2% of their adjusted gross income (AGI) were deductible. Under the current tax code, these costs can no longer be deducted.
If your clients used to purchase season tickets for football, basketball, or any sport at their college alma mater, they were once able to deduct that donation to the college or university. That’s no longer the case.
Form 1040 went through an overhaul due to TCJA. First, it was reduced to post card size for tax year 2018. Now in 2020, it looks a little bit different. The form is still simplified, but accounts for items like cryptocurrency, the CARES Act, and more.
To learn more about these updates, read Tax Year 2020: Changes to IRS Form 1040.
Pass-Through income deduction
If any of your clients are small business owners, they may qualify for the new pass-through income deduction. With this tax break, a 20% deduction is given to small business owners and self-employed individuals with pass-through businesses such as sole proprietorships, partnerships, S corporations, or limited liability companies (LLCs). There are some caveats to this deduction, so be sure to check out the IRS website to find more details.