The Tax Cuts and Jobs Act (TCJA) made a lot of changes to the tax code when it went into effect in 2018. The law tweaked and even eliminated many itemized deductions, and subsequent legislation has made some additional changes as well. Most are temporary, however. They’ll expire in 2025 unless Congress moves to keep some or all of them in place.
The Medical Expenses Deduction
Changes to the itemized deduction for medical expenses have actually been favorable for taxpayers.
Through the 2016 tax year, you could only claim a deduction for the portion of your expenses that exceeded 10% of your adjusted gross income (AGI). The TCJA reduced that threshold to 7.5% for tax years 2017 and 2018, and extended it through 2019. Then the Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the 7.5% threshold for one more year, through the end of 2020.
The Consolidated Appropriations Act 2021 made the 7.5% threshold permanent starting with the 2021 tax year.
The other rules remain the same. You can claim expenses incurred for yourself, your spouse, or your dependents, and you must have paid them in the same year you claim them as a deduction. Cosmetic and elective surgeries and treatments generally aren't deductible unless they're preventative or treat existing problems.
The State and Local Taxes Deduction (SALT)
This deduction was a matter of hot debate as the TCJA made its way through Congress at the end of 2017. It used to be unlimited, and it covered a range of taxes, including property, sales, and income. You did have to choose between deducting sales taxes or state income taxes, however. You couldn’t claim a deduction for both.
That’s still the rule, but the TCJA imposes an overall limit to how much you can deduct. The SALT deduction caps out at a cumulative $10,000 under the terms of the TCJA.
You'll lose $1,000 of your deduction in the 2020 tax year—the return you'd file in 2021—if you pay—if you pay $6,000 in property taxes and $5,000 in income taxes for a total of $11,000. You can claim either $5,000 in property taxes plus your income taxes, or $4,000 in income taxes plus your property taxes, but the total can't exceed $10,000. This can be a real blow to those who live in states with high income tax rates or areas with high property tax rates.
You must cut that $10,000 figure in half if you’re married and file a separate return. Married separate filers are entitled to only a $5,000 deduction. This rule doesn’t apply to single or head of household filers, however—they can claim the full $10,000.
Foreign real property taxes can’t be deducted anymore, either. The TCJA eliminated that tax law provision.
This aspect of the TCJA had many taxpayers storming their local property tax assessment offices at the end of 2017, hoping to prepay their 2018 taxes so they could still claim a deduction for the full amount before the law took effect. The IRS effectively said, “Not so fast!” on December 27, 2017.
Taxes must be officially assessed at the time you pay them or you can't deduct them. You must actually receive a bill for your 2021 taxes—and pay them—before December 31, 2020. You can’t claim a 2020 deduction for what the IRS calls “anticipated" taxes.
The Deduction for Home Mortgage Interest
This deduction wasn't eliminated, but it suffered a bit. It’s more restricted, although many taxpayers won’t feel the bite. Only those who can afford particularly sizable mortgages are affected.
It used to be that you could deduct interest on mortgage loans of up to $1 million if they were used to acquire a first or second residence, or $500,000 if you were married and filed a separate return. You could also deduct interest on home equity loans of up to $100,000.
The TCJA cut this to acquisition loans topping out at $750,000, or $375,000 for married taxpayers filing separate returns, and you can no longer deduct interest on home equity loans unless the proceeds are used to "buy, build, or substantially improve" the home.
The changes to the home mortgage interest deduction shouldn't affect you unless you can qualify for a $750,000-plus mortgage.
The old $1 million limit applied to mortgages contracted for before Dec. 14, 2017, and you must have closed on the property by April 1, 2018.
And here’s another wrinkle: You couldn't refinance an existing mortgage that you took out before December 14 in tax year 2018 or later, though you can still deduct the interest, but only if the refinanced amount isn’t greater than your old loan balance.
The deduction for interest on home equity loans has been eliminated if you use the proceeds for personal purposes, but you're fine if you’re not taking any cash out.
Deductions Affecting Workers
The TCJA eliminated two advantageous deductions for the working class.
It used to be that you could deduct certain moving expenses if you had to relocate for work-related reasons, subject to several qualifying rules. Hopefully, you moved before December 31, 2017, or you can hold off on doing so until the TCJA expires in 2025, because this deduction was repealed by the TCJA.
This was technically an above-the-line deduction, not an itemized deduction. You could claim it in addition to your itemized deductions or your standard deduction, which makes this loss particularly painful. The repeal doesn't affect active duty military personnel, however. They can still claim this deduction when and if they’re forced to move for service-related reasons.
Those miscellaneous itemized deductions that you used to be able to claim for expenses you paid for work-related purposes are gone, too. But these were only deductible to the extent that they exceeded 2% of your AGI, and only if they weren't reimbursed by your employer.
The Casualty and Theft Losses Deduction
The casualty and theft losses itemized deduction survived…sort of. As of 2018, you could only claim this deduction if you suffered a loss due to a federally-declared disaster.
The U.S. President must officially cite the event as a disaster. Fortunately, this covers most catastrophic events like hurricanes, but you’re out of luck if your neighbor stole your brand new laptop at any point after January 1, 2018.
No More Pease Limitations
Charitable deductions are still alive and well and they remain unchanged, and here’s a bit of good news. This deduction—as well as the home mortgage interest deduction—was subject to Pease limitations through 2017. These limitations reduced itemized deductions by 3% for every dollar of taxable income over certain thresholds, ultimately up to 80% of their itemized deductions.
The TCJA repealed Pease limitations, at least through 2025. Keep in mind, deductions for charitable contributions are usually limited to 60% of your adjusted gross income. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act 2021 temporarily suspended the 60% of AGI limitation for qualified cash contributions
The TCJA repealed Pease limitations, so go ahead and donate to your favorite charity no matter how much you earn. You can still claim this tax deduction in full.
The Standard Deduction vs. Itemized Deductions
Yes, you've lost a handful of itemized deductions and other deductions have become more limited, but the TCJA also nearly doubled standard deductions for all filing statuses. For tax year 2020, standard deductions for each filing status are:
- $12,400 for single taxpayers and married filers of separate returns, increasing to $12,550 in 2021
- $18,650 for those who qualify as head of household, increasing to $18,800 in 2021
- $24,800 for married taxpayers filing jointly, increasing to $25,200 in 2021
Your available itemized deductions might have shrunk, but your available standard deduction will mushroom, potentially offsetting any loss.
The Bottom Line
You might find that you're in much the same tax situation as before this legislation passed, or you might even come out ahead under these rules. Plan your 2021 spending accordingly if you’re making expenditures with the expectation of deducting them at tax time, and keep in mind that you might be able to make up some—if not all—of the difference by claiming the standard deduction instead.