The Tax Cuts and Jobs Act of 2017 made major changes to the tax code and were a mixed bag for some households. While the standard deduction nearly doubled and the child tax credit increased, many other deductions and credits were eliminated.
Not much will be changing for the 2020 tax year though. “There’s a lot of confusion about the stimulus package,” says Greg Hammer, president of Hammer Financial in Schererville, Indiana. However, the provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act shouldn’t impact tax deductions for consumers. People shouldn’t have to worry about government stimulus payments being counted as income either. “Essentially, the intent was to give people the money,” according to Hammer.
While some crucial tax breaks might return after portions of the tax law expire in 2025, here are 12 tax deductions that disappeared in 2018 and won’t be available this spring:
- The standard $6,350 deduction.
- Personal exemptions.
- Unlimited state and local tax deductions.
- A $1 million mortgage interest deduction.
- An unrestricted deduction for home equity loan interest.
- Deductions for unreimbursed employee expenses.
- Miscellaneous itemized deductions.
- A deduction for moving expenses.
- Unrestricted casualty loss deduction.
- Alimony deduction.
- Deductions for certain school donations.
- Charitable donation deductions for some taxpayers.
1. Standard $6,350 Deduction
Some of the best news from the tax reform law was an increase in the standard deduction. “The overall effect of the tax reform was that most taxpayers were better off using the standard deductions rather than itemizing their deductible expenses,” says Daniel Laginess, CPA and managing partner at Creative Financial Solutions in Southfield, Michigan.
While single taxpayers were only eligible for a $6,350 standard deduction in 2017, that amount nearly doubled in the 2018 tax year to $12,000. For 2020 filings, the standard deduction for individuals is increasing even further to $12,400. Married couples will get a standard deduction of $24,800 when they file tax forms this spring, and head of household filers are entitled to deduct $18,650.
“The amount of people who are eligible for (itemized) deductions has really dropped,” says Timothy McGrath, managing partner for Chicago-based Riverpoint Wealth Management. Unless someone is a homeowner with significant mortgage interest, a standard deduction will likely result in greater tax savings compared to itemizing.
2. Personal Exemptions
The increased standard deduction was welcome news for many households, but there was a trade-off. It eliminated several previously allowed deductions and the personal exemption for taxpayers and dependents, Laginess says.
While not technically a deduction, the exemption allowed taxpayers to subtract $4,050 from their taxable income for each dependent they claimed, so eliminating it is a significant loss for families. The increased standard deduction helps soften the blow of losing personal exemptions, but it might not make up for it entirely.
3. Unlimited State and Local Tax Deductions
State and local taxes have long been one of the largest write-offs for those who itemize deductions. Known by the acronym SALT, they can still be deducted but are capped at $10,000 per year. The limit is particularly detrimental to those living in states like California and New York, which both have above-average state income tax and property tax rates. “There are a lot of high earners who aren’t getting much of a deduction with a cap of $10,000 per year,” McGrath says.
4. $1 Million Mortgage Interest Deduction
Another change that disproportionately affects those living in states such as California and New York is the restriction on the amount of mortgage interest that can be deducted. In 2017, married taxpayers could deduct interest on a mortgage of up to $1 million. Starting with the 2018 tax year, only interest on mortgage values of up to $750,000 are now deductible.
5. Unrestricted Deduction for Home Equity Loan Interest
The Tax Cuts and Jobs Act also eliminated the unlimited interest deduction for both new and existing home equity loans. Homeowners used to be able to deduct interest for loans taken out for any purpose, such as debt consolidation or travel. Now, only interest on home equity loans used to make home improvements are eligible for a deduction. Plus, the combined total of the first mortgage and home equity loan can’t exceed $750,000 for married couples filing jointly.
6. Deductions for Unreimbursed Employee Expenses
Workers who made unreimbursed purchases related to their job were able to deduct any amount that exceeded 2% of their adjusted gross income in 2017. “(Some workers) used to have big write-offs,” says Paul Axberg, a CPA and president of Axberg Wealth Management, an Arizona-based tax, financial and retirement planning firm.
However, taxpayers won’t see that deduction available on their 2020 tax return. To compensate for the loss of the deduction, workers may want to negotiate for reimbursement from their employers instead.
7. Miscellaneous Itemized Deductions
Unreimbursed work expenses are one of several miscellaneous itemized deductions that have been disallowed under the tax reform law. Other disappearing miscellaneous deductions include fees for financial services, costs related to tax preparation services, investment fees, professional dues and a long list of other previously approved items.
Those who are independent contractors can deduct many of these items as business expenses on Schedule C. That means people who work in the gig economy or perform freelance work may be able to still claim a deduction for these expenses. However, the IRS has specific rules about who qualifies as an independent contractor, and these workers also must pay self-employment taxes. Check with a tax professional for details and to determine what makes the most financial sense for your situation.
8. Deduction for Moving Expenses
If you relocated for a new job last year, forget about deducting your moving expenses from your 2020 taxes. The deduction has been eliminated for virtually all workers. Only military members who are required to move for a new assignment qualify for the deduction now.
9. Unrestricted Casualty Loss Deduction
Beginning in 2018, only those in presidentially designated disaster zones can deduct casualty losses on their tax forms. That means, for example, if your house burns down but insurance doesn’t cover all your costs, you can’t write off the loss from your federal taxes.
10. Alimony Deduction
In the past, couples could set up alimony agreements that would allow the person making payments to deduct that money from their federal taxes. While those with divorce agreements finalized before Dec. 31, 2018 can continue to deduct alimony payments, that won’t be an option for anyone whose separation was completed after that date.
Under the new tax law, alimony is no longer considered taxable income by the recipient, so not only is it not deductible by the payee, but people can no longer deduct any legal fees related to setting up an alimony agreement. Those who divorced in 2020 may want to look for another way to compensate a spouse, such as through the gift of an IRA, in order to avoid nondeductible alimony.
11. Deductions for Certain School Donations
Some colleges and universities have required alumni to make donations before they are able to purchase season tickets. Prior to 2018, those donations were tax-deductible. While sports seasons were cut short because of the pandemic in 2020, anyone who did make a donation tied to the right to purchase tickets should know that deduction is no longer available under the Tax Cuts and Jobs Act.
12. Charitable Donation Deductions for Some Taxpayers
Deductions for charitable gifts haven’t been eliminated, but they have become harder for people to claim. The CARES Act allows everyone to take a $300 deduction for cash charitable donations in 2020. However, to deduct anything above that, taxpayers will need to itemize deductions, something few people now do because of the increase in the standard deduction.
For those who can itemize, the good news is they can donate and deduct a higher percentage of their income. “You can give up to 100% of your income and deduct it all,” Axberg says. Previously, people were limited to deducting up to 60% of their adjusted gross income, but that limit was temporarily lifted by the CARES Act.
“I think there is a lot more planning that needs to be done going forward,” McGrath says. Those who don’t have enough deductions to warrant itemizing on an annual basis may want to think strategically about their donations. One option would be to bunch donations into a single year rather than spreading gifts over multiple years. Another is to create a donor-advised fund. This will allow you to make a large, deductible contribution in one year but then dole out charitable gifts from the fund over several years.