How is My Tax Situation Different After the Passage of the Tax Cuts and Jobs Act?

Posted on September 14, 2020

The Tax Cuts and Jobs Act of 2017, the single largest tax reform legislation in the last 30 years, took effect in 2018 and changed tax laws impacting retirement planning, mortgages, corporation, partnerships, small-business owners and even state taxes.

For personal income tax, popular tax deductions became significantly smaller or were eliminated altogether. Let’s look at three popular tax deductions that are changing for your 2018 tax filing.

The following three popular tax deductions have changed tax filing.

1. Deduction on your Mortgage Interest 

Before the tax reform, you could deduct interest paid on up to the first $1 million of a mortgage used to acquire or substantially improve your home. You could also deduct interest paid on “home equity indebtedness,” the first $100,000 of a mortgage used for another purpose, such as for college expenses, cashing out equity, or paying off credit card debt.

Home equity indebtedness interest can no longer be deducted; no grandfathering exists, and you have no way to change this debt. The non-deductibility follows even if you refinance home equity indebtedness into another mortgage. 

Your mortgage is only deductible if you used it to substantially improve your property or purchase the home. Mortgages issued after Dec. 15, 2017, are treated as home acquisition indebtedness and the interest deduction is capped for interest paid on the first $750,000 of debt.

Previously acquired indebtedness mortgages are grandfathered in under the $1 million limit. As usual, taking a mortgage interest deduction means the taxpayer must itemize their deductions.

2. State and Local Tax Deduction (SALT)

Many states charge state income taxes. Previously, you could deduct almost any paid state or local income taxes from your federal taxes, if you lived in a state that charges state income tax. 

The TCJA made significant changes to the deductibility of your state and local taxes, capping the amount at $10,000 per year total for state and local income taxes, property taxes and sales taxes. This applies to single filers and those married couples filing jointly. 

High-income tax states like New York, New Jersey, California, Massachusetts and Connecticut are the most impacted.

You could lose a significant deduction if you have a big estate with lots of land, and just like the mortgage interest deduction, you must itemize to benefit from the deduction.

3. Charitable Contributions

Well, here again, you’ll need to itemize your deductions to take advantage of any charitable contributions you make. 

Standard deductions were almost doubled, so this isn’t necessarily bad news. Single filers get a $12,000 standard deduction and married filing jointly receive a $24,000 standard deduction. If you go with the standard deduction, you don’t need to itemize your deductions, and you don’t get to count off your charitable contributions. However, strategies exist to maximize your tax deductions for your charitable contributions, including bunching contributions and donor advised funds. You’ll learn more about Donor-Advised Funds below.Although the TCJA cut out some big, popular deductions, the increased standard deductions may have offset the loss of past deductions like mortgage interest, SALT, and charitable contributions. 

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