Please ensure Javascript is enabled for purposes of website accessibility

95% of Americans Won't Benefit From These 5 Tax Breaks in 2018

By Matthew Frankel, CFP® – Updated Apr 30, 2018 at 3:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Have you been deducting your mortgage interest or charitable donations? You may not want to in 2018 and beyond.

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.

Tax reform written on the cover of a notebook.

Image source: Getty Images.

  • 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.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.