The Tax Cuts and Jobs Act certainly contains some provisions that should reduce the tax bills of millions of Americans. In fact, most American taxpayers will pay significantly less tax in 2018 than they did in 2017.
However, this isn't the case for everyone, and the benefits might not be as big as you think -- especially if you generally itemize deductions every year. While about 30% of Americans in 2017 and earlier tax years itemized their deductions, it is estimated that the new standard deduction structure will mean that itemizing will only remain worthwhile for about 5% of taxpayers. That means these five popular tax breaks will no longer be useful to the vast majority of people when they file their next tax return in 2019.
- Mortgage interest: The Tax Cuts and Jobs Act keeps the mortgage interest deduction intact, but with a slightly lower cap of $750,000 in mortgage principal.
- Charitable contributions: U.S. taxpayers can deduct contributions made to charitable organizations, up to 50% of their adjusted gross income.
- Medical expenses: The Tax Cuts and Jobs Act changed the threshold for medical expense deductions in 2018. Taxpayers can now deduct medical expenses in excess of 7.5% of their adjusted gross income, compared to 10% under previous law.
- State and local taxes: Known as the SALT deduction, this was one of the most controversial points of the tax reform process. In the end, the deduction was kept, but was capped at a total of $10,000 of combined property and income (or sales) taxes.
- Casualty and theft losses: This is a relatively uncommon deduction, but can be quite valuable to taxpayers who qualify for it.
The standard deduction is higher, but to say it has "doubled" is a bit of a stretch
The Tax Cuts and Jobs Act's higher standard deduction was sold to the American public as a "doubling" of the deduction amount. And technically speaking, this is correct. The 2018 standard deduction will be nearly twice as much as it was in 2017.
However, this isn't truly "double" the previous deduction. The valuable personal exemption, which was essentially an additional $4,050 deduction for every taxpayer and dependent, is going away, which could actually translate to less of a total deduction for taxpayers with several dependents.
The losers of tax reform?
Arguably the biggest losers of tax reform will be the roughly 25% of taxpayers who itemized their deductions under the previous tax law, who will no longer be able to do so. This is especially true for families with several children.
Here's an example. Let's say that a married couple with three children pays $10,000 in mortgage interest, donates $5,000 to charity, and pays $8,000 in state and local taxes, for a total of $23,000 in deductions.
In 2017, this amount was $10,300 greater than the standard deduction, so itemizing would be a no-brainer. This couple would be entitled to $23,000 in tax deductions, plus five personal exemptions -- two for themselves and one for each child.
In 2018, however, this couple would no longer itemize, as the standard deduction of $24,000 is greater than the sum of their deductions. The good news is that this couple's deduction would be $1,000 more than last year's. However, the bad news is that the couple would also lose their five personal exemptions, which totaled $20,250 in 2017. So, even with the higher standard deduction, this couple's taxable income would actually increase by $19,250 in 2018, with all other things being equal.
To be fair, the new lower tax brackets and expanded Child Tax Credit should help to somewhat offset the loss of the personal exemption, and there are obviously more variables involved in any particular tax situation than I've mentioned here. However, even after factoring those things into the equation, taxpayers like our hypothetical couple could certainly see their tax bills rise in 2018.