Most taxpayers have never itemized their deductions. And the new tax law that took effect this year will ensure that even fewer filers fill out a Schedule A.
By nearly doubling the standard deduction amounts, the Tax Cuts and Jobs Act (TCJA) will prompt more folks to use them instead of messing with the record keeping and extra paperwork itemized deductions require.
Plus, as I'm sure you've heard by now, starting with the 2018 tax year and running through, for now, 2025, other TCJA changes will make itemizing even less valuable.
The amount of state and local taxes, including your home's property tax bill, is limited to $10,000. You can claim casualty losses only if they're from a major disaster. And the miscellaneous section on Schedule A will be gone completely on next year's form.
So if your 2017 tax return is your last year of taking an itemized deduction amount, make the most of it.
Here's a closer look at what you can claim and where it goes on your 2017 Schedule A. You can click on each image for a larger look or click on the Schedule A header above to see the full form.
Being sick sucks. Having to pay a lot of out-of-pocket medical expenses is a pain, too. But if you have a lot of medical and dental costs, you might be able to put them to tax deduction use in this first section of Schedule A.
The key here is to make sure the expenses are OK by the Internal Revenue Service, aka qualified medical expenditures. There are some you might not have considered. You'll find some in my earlier post on maximizing medical deductions, as well as the full list in IRS Publication 502.
When you do have to have enough medical costs to claim, they go in this first section of Schedule A. Note that there's no mention of a 10 percent threshold on the 2017 form. That's thanks to one good thing about the TCJA for itemizers: it cut that percentage threshold, which had gone up to 10 percent for filers younger than 65 under an Affordable Care Act provision, to the previous 7.5 level for the 2017 retroactively as well as for 2018. That means more of your medical costs might be deductible.
Residents of 43 states and the District of Columbia pay at least some state income taxes. If you live in one of those locations, you can deduct those taxes here.
Don't forget your local income taxes. Yes, some cities and counties collect them, too, as well as some special taxing jurisdictions, such as for mass transportation in your area. They're also deductible as an itemized expense.
If, however, you live in one of the seven states without an income tax — that's Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — or your state income tax is low, you'll want to deduct instead your state and local sales taxes in this Schedule A section.
The IRS provides average amounts for each state so you don't have to hang onto all those receipts. But you will need the sales document for any made a major taxable purchase, such as a car or boat, during the year. You can add that general sales tax amount to the total from the IRS table that you claim.
Remember, it's an either/or choice. You can't mix and match sales and income tax deductions. You must choose just one to claim on this section of your Schedule A.
Homeowners also get to write off their annual property taxes here. And if you have a second home or any other personal-use, not rental, properties, those real estate taxes are claimed here.
Some places levy personal property taxes, too, typically on autos and other vehicles. Deduct that amount here.
If you live in a high tax area, your 2017 tax filing could be the last one, at least for a while, where you get to claim all the state and local taxes you paid. Make sure you get them all.
Starting in 2018, this itemized amount is capped at $10,000.
Schedule A has two lines for claiming mortgage interest paid. The first is for the amount reported on your annual Form 1098 or an accepted IRS substitute that you (with a copy to the IRS) get early each year from your lender. That goes on line 10. If you pay mortgage interest that's not reported on a Form 1098, it goes on line 11.
The interest you can claim here is from your primary residence's loan and on a second home loan. If you own more than two houses, you're out of tax deduction luck. You only get to write off interest on your main and one second home. Don't be confused here by the property taxes mentioned in the previous section. Yes, you get to deduct all property taxes on Schedule A for all your personal real estate, but mortgage interest for only two homes.
And note the margin note on the form that "your mortgage interest deduction may be limited." This comes into play when the total of your home and second home mortgages are more than $1 million. It also refers to home equity loans, the interest on which also is tax deductible. When you or your spouse if you file jointly got a home equity loan or home equity line of credit (HELOC) and used the money for reasons not related to your home (e.g., to pay a child's college costs or pay off credit card bills), these loans can't be over $100,000.
This deduction will remain under the TCJA, but in some cases is reduced a bit. Deductible interest on home acquisition debt after Dec. 15, 2017, goes from $1 million to $750,000 ($375,000 in the case of married taxpayers filing separately).
Don't worry if you got your loan on your expensive home before then. Mortgage debt incurred before Dec. 15, 2017, is grandfathered at $1 million limit ($500,000 for married but separately filing couples). That's also true if you had a contract to buy a house by the December date and closed by Jan. 1, 2018.
Refinancing debt from before Dec. 15, 2017, keeps the grandfathered limit providing the mortgage is not increased. But starting in 2018 the TCJA does away with the deduction for interest on home equity indebtedness that's not related to the property itself.
Some homeowners also get to deduct private mortgage insurance (PMI) premiums as interest on this section of Schedule A. PMI policies typically are required by lenders when a home buyer can't make at least a 20 percent down payment on their home. This itemized deduction first appeared in 2006 and was renewed periodically as part of tax extenders packages over the years. However, it expired at the end of 2016. The good news is that when Congress passed the fiscal year 2018 budget in early February, it renewed the PMI deduction (and other tax breaks) for the 2017 tax year.
A final home-related expense can be an itemized deduction here if you paid points. These are added loan application payments — each is 1 percent of your loan amount — to get a lower mortgage rate.
Investment interest, which is the amount you paid on money you borrowed to buy stocks, bonds and other equities also is deductible. You enter it on line 14 of your Schedule A.
Most people don't donate to charity for tax reasons, but if you can claim a deduction for your charitable gift, then by all means do so. This deduction includes cash, check and credit card donations, as well as gifts of household goods and clothing.
Don't forget about other, atypical types of donations, such as appreciated stocks. Volunteering doesn't count, but you can count the value of out-of-pocket expenses you incur while giving of your time, as well as the miles you drive your own car for charitable purposes.
No matter how you give to your favorite nonprofit, get a receipt.
The good TCJA and itemizing news here is that this Schedule A deduction remains. In fact, the new tax law allows those who can give more to public charities in a tax year to do, upping the giving limit from 50 percent of your adjusted gross income to 60 percent.
This filing, however, is the last where you can claim this many types of losses. The TCJA now restricts such itemized claims only to losses suffered in what is declared a major natural disaster.
Sometimes you have to cover some costs in connection with your job. This includes such things as buying work-required uniforms and keeping them presentable or memberships in professional organizations. You might be able to claim those 2017 expenses here.
You also can claim money spent in 2017 searching for a new job in this section of your Schedule A.
And if you paid a tax pro to fill out your Schedule A and other tax forms last year, deduct your tax preparation fees, as well as any fees you paid then to e-file. You also can count the tax software you bought last year to do your taxes yourself.
Other miscellaneous expenses you can include in this section are those that paid to produce income. This includes certain legal and accounting fees, some investment expenses, even the annual charge for a safe deposit box to hold your securities.
There's one problem here, though. All these miscellaneous amounts accrued in 2017 must be more than 2 percent of your AGI before they count as itemized deductions.
And as for the 2018 tax year, you can toss any receipts you were holding onto for this section when you file next year. The TCJA eliminated all miscellaneous deductions starting with this tax year.
As you've figured out by its separate section on Schedule A, this is a different category of deductible miscellaneous expenses. These are not subject to the 2 percent limitation.
The most commonly claimed expense here — or at least the most popularly referred to — is gambling losses that offset your winnings you report on line 21 of your Form 1040.
You also can enter here casualty and theft losses of income-producing property, losses from other activities from box 2 of a Schedule K-1, certain unrecovered investment in a pension and impairment-related work expenses of a disabled person. Yeah, they're rather arcane claims. You can find more details in IRS Publication 529.
And while the job related and miscellaneous expenses won't be on the 2018 Schedule A, these other miscellaneous deductions will remain.
In this last section, you total up all your allowable Schedule A deductions. But if you made more than a certain amount last year, then some of your itemized deductions could be reduced.
This is known as the Pease limitation, one of several laws named after their advocates. The late Rep. Don Pease (D-Ohio) championed the deduction limits on higher-income taxpayers. When you hit the threshold for your filing status, your Schedule A amounts for home mortgage interest, state and local tax claims, charitable gifts and miscellaneous deductions is reduced by either 3 percent of your adjusted gross income in excess of your threshold amount or 80 percent of the amount of itemized deductions you otherwise could claim for the tax year.
Yeah, this is one of those things you let your tax pro or tax prep software figure for you!
And for 2018, you won't have to worry about it all. The Pease limitations are gone under the TCJA.
Picking your deduction method: If you made it through this post and your Schedule A, which is today's Daily Tax Tip, you understand why most people will likely opt for the larger standard deduction method under the new tax law.
Claiming the standard deduction is so much easier. And with the larger amounts for tax years 2018 through 2025, the shift will be a no-brainer for many filers.
But even with the TCJA itemized deduction changes, don't automatically discount using Schedule A next year. You can make your deduction type decision each tax filing season, depending on your tax circumstances for that year.
If something happens that could increase your 2018 or beyond itemized amounts to where they exceed the new and bigger standard deduction you can claim, then by all means itemize. You always want to use the tax deduction method that's larger, even if it means more work.
And if that means you itemize, make sure you maximize your Schedule A write-offs.
You also might find these items of interest:
- Bunching your deductions
- 12 overlooked tax breaks to hunt for as you file your taxes
- Tax deductions even if you don't itemize for 2017 and 2018