Deductions aren’t what they once were, but tax-saving opportunities remain
For many taxpayers, deductions aren’t as powerful as they used to be before several significant Tax Cuts and Jobs Act (TCJA) provisions went into effect last year. For example, the TCJA generally reduced tax rates, and deductions save less tax when rates are lower. The TCJA also reduced or eliminated many deductions. But proper timing of deductible expenses can still help maximize your tax savings. So can taking advantage of other breaks related to your home and your health care.
Standard deduction vs. itemizing
Taxpayers can choose to either itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated. The TCJA nearly doubled the standard deduction for each filing status. Those amounts are to be annually adjusted for inflation through 2025, after which they’re scheduled to drop back to the amounts under pre-TCJA law. (See Chart 1 for 2019 amounts.)
The combination of a higher standard deduction and the reduction or elimination of many itemized deductions means that some taxpayers who once benefited from itemizing are now better off taking the standard deduction.
State and local tax deduction
Through 2025, your entire itemized deduction for state and local taxes — including property tax and the greater of income or sales tax — is limited to $10,000 ($5,000 if you’re married filing separately).
Deducting sales tax instead of income tax may be beneficial if you reside in a state with no, or low, income tax or you purchased a major item, such as a car or boat.
Consider both deductions and exclusions in your tax planning:
Property tax deduction. As noted above, through 2025 your property tax deduction is subject to the limit on deductions for state and local taxes.
Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. Through 2025, the TCJA reduces the mortgage
debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.
Home equity debt interest deduction. Through 2025, the TCJA effectively limits the home equity interest deduction to debt that would qualify for the home mortgage interest deduction. (Under pre-TCJA law, interest was deductible on up to $100,000 of home equity debt used for any purpose, such as to pay off credit
card debt or to buy a car.)
Home office deduction. If you’re an employee and work from home, home office expenses aren’t deductible through 2025, because of the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. (If you’re self-employed, you may still be able to deduct home office
expenses. See Case Study 5 on page 20.)
Personal casualty and theft loss deduction. Through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.
Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.
Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if you meet certain tests. Warning: Gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.
Loss deduction. If you sell your home at a loss and part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
Moving expenses. Through 2025, work-related moving expenses are deductible only by active-duty members of the Armed Forces (and their spouses or dependents) who move because of a military order that calls for a permanent change of station. (If you’re eligible, you don’t have to itemize to claim this deduction.)
Donations to qualified charities are generally fully deductible — but only if you itemize deductions. If itemizing no longer will save you tax because of the increased standard deduction, you won’t get a federal income tax benefit from charitable gifts. However, you might benefit from “bunching” donations into alternating
years if your total itemized deductions in those years would then surpass your standard deduction. You can then itemize just in those years.
For large donations, discuss with your tax advisor which assets to give and the best ways to give them. For example, appreciated publicly traded stock you’ve held more than one year can make one of the best charitable gifts because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you
sold the property. You can enjoy the capital gains tax savings whether or not you itemize deductions.
Tax-advantaged saving for health care
You may be able to save taxes without having to worry about the medical expense deduction floor (see “What’s new!” at right) by contributing to one of these accounts:
HSA. If you’re covered by a qualified high-deductible health plan, you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,500 for self-only coverage and $7,000 for family coverage (plus $1,000 if you’re age 55 or
older) for 2019. HSAs can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year, allowing the account to grow.
FSA. You can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,700 in 2019. The plan pays or reimburses you for qualified medical expenses. What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 21/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain permitted expenses.
Alternative minimum tax
Before timing deductions, consider the AMT — a separate tax system that disallows some tax deductions, such as for state and local taxes, and treats certain income items differently, such as incentive stock option exercises. You must pay the AMT if your AMT liability exceeds your regular tax liability.
The TCJA substantially increases the AMT exemptions through 2025. (See Chart 9 on page 31.) Combined with other TCJA changes, the result is that very few taxpayers will be at AMT risk. Your tax advisor can help you determine if you’re among the small number of taxpayers who need to plan for the AMT.