taxes

3 Lost Tax Deductions That Might Surprise You

As you’re doing your 2018 taxes, you'll see that deductions certainly aren't what they used to be.

The Tax Cuts and Jobs Act was the single largest tax reform legislation passed in the last 30 years. It changes tax laws that impact retirement planning, mortgages, corporation, partnerships, small-business owners and even state taxes to some degree. 

While the TCJA was passed and signed into law on Dec. 22, 2017, 2018 was the first year it really hit home for personal income taxes. As you gear up to file your taxes before April 15, 2019, you might be surprised to find many popular tax deductions are either significantly smaller or eliminated altogether.

Let’s look at three popular tax deductions that are changing for your 2018 tax filing.

1. Mortgage Interest Deduction

While the tax code does not generally allow individuals to deduct personal interest expenses, there is an exception for your home mortgage interest. Prior to 2018, you could deduct interest paid on up to the first $1 million of a mortgage used to acquire or substantially improve your home. Additionally, you could deduct interest paid on the first $100,000 of a mortgage that was used for any other purpose — known as “home equity indebtedness” — like to pay off credit card debt, cash out equity or for college expenses.

Starting in 2018, you can no longer deduct home equity indebtedness interest. There is no grandfathering and really no way to change this debt. Even if you refinance home equity indebtedness into another mortgage, the non-deductibility follows it. The deductibility of the interest really does go to how you used the loan.

If your mortgage was used for anything other than substantially improving the property or purchasing the home, it is no longer deductible. Furthermore, new mortgages issued after Dec. 15, 2017*, that are treated as home acquisition indebtedness now have a cap on the interest deduction for interest paid on the first $750,000 of debt.

However, prior acquisition indebtedness mortgages are grandfathered in under the $1 million limit. Additionally, any mortgage interest deduction requires that the taxpayer itemize their deductions.

2. State and Local Tax Deduction (SALT)

Many states charge state income taxes. In the past, you could deduct almost any state or local income taxes paid from your federal taxes to help reduce your tax burden. However, the TCJA made significant changes to the deductibility of your state and local taxes.

Now, in 2018, filers are capped at $10,000 per year total for state and local income taxes, property taxes and sales taxes. Single filers have a maximum deduction of $10,000 for SALTs — and so do those married filing jointly!

The SALT deduction limit of $10,000 hits those in high income tax states the most — states like New York, New Jersey, California, Massachusetts and Connecticut.

Even if you live in a low-income tax state, you could lose a significant deduction if you have a lot of property. If you have big estates, lots of land or acres, you could see this tax deduction severely curtailed by the new cap. Just like with the mortgage interest deduction, you need to itemize to benefit from the deduction.

3. Charitable Contributions

While charitable contributions were not removed by the TCJA, far fewer Americans will be able to take advantage of them in 2018. In order to deduct charitable contributions, you need to itemize. The number of tax filers who will itemize for 2018 is expected to drop dramatically.

But this isn’t all bad news. One reason itemizing at the federal level is dropping in 2018 is due to both reduced deductions and standard deduction almost doubling. In 2018, the standard deduction for a single filer is $12,000 and for married filing jointly is $24,000 — nearly double the standard deduction in 2017.

As such, far fewer individuals will have itemized expenses taking them above the standard deduction, meaning many people will not be able to deduct their charitable contributions. Keep in mind that there are some strategies to maximize your tax deductions for your charitable contributions, including bunching contributions and donor advised funds.

Whether you end up paying more or less in taxes in 2018 really depends on your situation. If you relied heavily on these popular itemized tax deductions in the past, your taxes could go up. Overall, most people will end up seeing a slight decrease in taxes thanks to the increased standard deduction — even though we said goodbye to some big deductions.

*Note that there’s an exception/grandfather clause for mortgages where there’s a binding contract before Dec. 15, 2017, to close before Jan. 1, 2018, and the purchase is complete by April 1, 2018.

About the Author

Jamie P. Hopkins, Esq., CFP, RICP

Director of Retirement Research, Carson Wealth

Jamie Hopkins is a well-recognized writer, speaker and thought leader in the area of retirement income planning. He serves as Director of Retirement Research at Carson Group and is a finance professor of practice at Creighton University's Heider College of Business. His most recent book, "Rewirement: Rewiring The Way You Think About Retirement," details the behavioral finance issues that hold people back from a more financially secure retirement.

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
How the Social Security Earnings Test May Affect Your Retirement
social security

How the Social Security Earnings Test May Affect Your Retirement

If you start taking Social Security benefits before your full retirement age and decide to continue working, you need to understand how the earnings t…
May 11, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Month
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Month

The IRS will start issuing automatic refunds sometime in May to people eligible for the unemployment benefit tax exemption.
May 10, 2021

Recommended

9 Reasons to File a Tax Return Even If You Don't Have To (Warning: They're Due May 17!)
tax filing

9 Reasons to File a Tax Return Even If You Don't Have To (Warning: They're Due May 17!)

Although you might not be required to file a tax return, it might be wise to file one anyway. Here are a few reasons why.
May 11, 2021
13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
May 11, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 11, 2021
The 10 Least Tax-Friendly States for Military Retirees
retirement

The 10 Least Tax-Friendly States for Military Retirees

Unfortunately, some states aren't very generous when it comes to helping retired veterans at tax time.
May 11, 2021