The Tax Cuts and Jobs Act, or TCJA, which came into effect on January 1, 2018, brings significant changes to the US tax code, particularly to its deduction rules. The far-reaching tax reform bill changed how individual and business taxpayers consider tax planning and filing. Here are some points that can be simplified through the major change brought in by TCJA on the issue of deductions.
The Standard Deduction
The most notable change that TCJA brought about is a high jump in the standard deduction amounts. This change had the strongest influence on the strategy that many filers of tax returns exercise about filing taxes.
Levels of Hikes
TCJA increased the standard deduction amounts nearly two-fold for all income reporting statuses. The amount for standard deduction in the tax year 2024 has been determined as follows:
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- $14,600 for individual filers
- $29,200 for married couples who have a joint tax return to file
- $14,600 for separately filing couples
- $21,900 for heads of household
Those amounts are scheduled to rise slightly in 2025, when single filers will be able to exclude $15,000 and married couples filing jointly $30,000.
Effect on Itemizing
This has led to many taxpayers who previously itemized their deductions switching over to taking the standard deduction. This has made tax filing easier for millions, but it has reduced tax benefits for some of these particular expenses that used to be deductible for those who itemize.
Itemized Deductions
Though it raised and simplified the standard deduction for most, TCJA greatly modified itemized deductions available to those still able to benefit from itemizing. This change underscored the growing divergence between the benefits of standard vs. itemized deductions, making it essential for taxpayers to evaluate their situation carefully.
State and Local Tax (SALT) Deduction
Among the most controversial changes was the imposition of a cap on the state and local tax deduction. The TCJA capped the combined deduction for state and local income, sales, and property taxes at $10,000 per year ($5,000 for married individuals filing separately). This mainly affects taxpayers who live in high-tax states and own valuable properties.
Mortgage Interest Deduction
TCJA made a few changes in the mortgage interest deduction:
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- Interest is only deductible on new mortgages acquired after December 15, 2017, for the first $750,000 of the loan, which for married filing separately, it’s $375,000.
- Home equity loan interest is completely eliminated unless used for home improvements.
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Medical Expense Deduction
The TCJA temporarily reduced the threshold for deducting medical expenses temporarily. Taxpayers were allowed to deduct medical expenses above 7.5% of their AGI in tax years 2017 and 2018-only as opposed to the earlier 10% threshold3. However, this was only a temporary relief, and for the following tax years, a threshold of 10% reemerged.
Charitable Contributions
Although the TCJA left intact the charitable contribution deduction, the higher standard deduction means fewer taxpayers itemize, and thus may reduce the tax incentive for charitable giving for some.
Repealed Deductions
The TCJA repealed several deductions that were available to taxpayers who itemize:
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- Personal exemptions were suspended through 2025.
- Miscellaneous itemized deductions subject to the 2% AGI floor were repealed. This includes unreimbursed employee expenses, tax preparation fees, and investment fees.
- Moving expenses deduction was barred, except for certain military persons.
- Alimony payments are no longer deductible for agreements entered into or modified after December 31, 2018.
Business Deductions
The TCJA has also introduced major modifications in business-related deductions:
Qualified Business Income Deduction
The new act brings a new deduction for pass-through businesses that allows the eligible taxpayers to deduct as much as 20 percent of their qualified business income.
Depreciation and Expensing
The TCJA enhanced bonus depreciation and Section 179 expensing, so businesses will be able to expense in full the cost of certain properties in the year the properties are placed in service.
Other Key Provisions
Alternative Minimum Tax (AMT)
The TCJA basically increased the exemption and phase-out thresholds for AMT, and thus fewer taxpayers are subject to the AMT.
Child Tax Credit
While not a tax cut, the Child Tax Credit was doubled under the TCJA-from $1,000 to $2,000 per qualifying child, with up to $1,400 being refundable24. Temporary Nature of Changes
It’s important to note that many of the changes introduced by the TCJA are set to expire at the end of 2025 unless Congress takes action to extend them. This sunset provision adds an element of uncertainty to long-term tax planning.
Conclusion
Sweeping changes under the Tax Cuts and Jobs Act left ripples throughout the U.S. tax code, dramatically impacting the way people use deductions. In some cases, the TCJA more than doubled the standard deduction; capped or even prohibited other itemized deductions and created new provisions-for instance, the Qualified Business Income deduction-causing an across-the-board shift in tax landscapes for both individuals and businesses.
These changes have made the tax filing so simple that many Americans are opting for the standard deduction. However, they have limited the tax benefit of certain expenses itemized by taxpayers. The cap on SALT and the changes in the mortgage interest deduction have had a lot of devastating impacts on high-tax states and places with large real estate markets.
As we approach the end date for most TCJA provisions scheduled to lapse in 2025, both taxpayers and policymakers should be careful to monitor all legislative action that can modify the tax code a bit more. Knowledge of those changes and what they bring will help taxpayers with effective planning and compliance for the coming years.
