Each year, taxpayers must choose between taking the standard deduction and itemizing deductions. Generally, if a taxpayer’s itemized deductions exceed the standard deduction, the taxpayer will elect to itemize. The Tax Cuts and Jobs Act of 2017 (TCJA) significantly impacted rules related to standard and itemized deductions. The following is a summary of the most notable changes.

 

Standard Deductions

Increased Standard Deduction Amounts

The TCJA significantly increased the standard deduction for each filing status. The 2021 inflation-adjusted amounts are shown in the chart below.

 

* The standard deduction for an individual who is claimed as a dependent on another taxpayer’s return is limited to the greater of 1) $1,100 or 2) the dependent’s earned income for the year plus $350, not to exceed the standard deduction amount for single taxpayers.

 

Inflation Adjustments to Additional Standard Deduction Amounts

The additional standard deduction amounts for taxpayers who are 65 years or older and/or blind continue to be adjusted for inflation. The TCJA made no other changes. The 2021 additional standard deduction amounts are shown in the chart below.

 

** Per person

 

Elimination of Personal Exemptions

The impact of the increased standard deduction amounts was counteracted to an extent by the elimination of personal exemptions. Before the implementation of the TCJA, a $4,050 deduction was available for each taxpayer and dependent listed on the return. This deduction is no longer available.

 

Itemized Deductions

The TCJA completely eliminated certain deductions while significantly limiting others. The following is a summary of those changes.

 

Cap on Deductibility of State and Local Taxes

Single taxpayers and married taxpayers filing jointly may deduct up to $10,000 of combined: (1) state and local property taxes and (2) either (i) state and local income taxes or (ii) state and local sales taxes. The limit is $5,000 for married taxpayers filing separately.

 

Reduced Cap on Deductibility of Mortgage Interest Paid

Single taxpayers and married taxpayers filing jointly may deduct interest paid on up to $750,000 of acquisition indebtedness incurred on December 15, 2017 or later ($375,000 for married taxpayers filing separately). For acquisition indebtedness incurred prior to December 15, 2017, the limit remains at $1,000,000. Acquisition indebtedness is defined as indebtedness incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer. Furthermore, the indebtedness must be secured by the particular residence that is acquired, constructed, or substantially improved by the loan.

 

Interest on Home Equity Indebtedness No Longer Deductible

Interest paid on home equity loans is no longer deductible regardless of the acquisition date of the loan. An exception is made for home equity loans taken out for the purpose of significantly improving the associated residence. A home equity loan established for this purpose satisfies the definition of “acquisition indebtedness” provided in the paragraph above.

 

Changes to Charitable Contribution Rules

The TCJA increased the limit on the deductibility of cash contributions to a public charity from 50% to 60% of the taxpayer’s AGI. Additionally, taxpayers are no longer allowed to claim a charitable deduction for contributions to colleges or universities made in exchange for athletic event seating rights.

 

Other Notable Changes

• Miscellaneous itemized deductions subject to the 2% floor, including advisory fees, tax preparation fees, unreimbursed job expenses, and safe deposit box fees, were eliminated.
• Personal casualty losses are no longer deductible unless they are attributable to a federally declared national disaster.
• The Pease Limitation, which limited the amount of itemized deductions allowed to high-income taxpayers, was repealed.

Overall, the TCJA simplified the filing process for many taxpayers who now elect the standard deduction in lieu of the time-consuming task of itemizing deductions. Those taxpayers who anticipate itemizing deductions should be familiar with the changes referenced above in order to more accurately anticipate their tax liability under the TCJA.