The Tax Cuts and Jobs Act of 2017 (TCJA), commonly referred to as “tax reform,” is now a couple of years old. But it continues to surprise taxpayers who don’t understand how various provisions affect them. As the most massive change to U.S. tax law in over 30 years, the TCJA lowered individual tax rates and expanded certain deductions and credits while limiting or eliminating others.
Wondering how it will impact your 2019 tax return? While everyone’s tax situation is unique, you need to consider several changes affecting most taxpayers.
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How Tax Reform Could Affect Your Taxes This Year
1. Your Available Standard Deduction Went Up
When you file your tax return, you have the option of calculating your itemized deductions or taking the standard deduction – an amount predetermined by the IRS and based on your filing status. Typically, if the available standard deduction is higher than your itemized deductions, you’ll opt to claim the standard deduction.
In 2017, the standard deduction was $6,350 for a single taxpayer and $12,700 for a married couple filing jointly. In 2018, tax reform nearly doubled the standard deduction for all filing statuses, increasing it to $12,000 for single filers and $24,000 for married couples filing jointly.
On 2019 returns, the standard deductions have increased to keep up with inflation. Here are the new standard deduction amounts for 2019:
- Single: $12,200
- Married Filing Jointly: $24,400
- Married Filing Separately: $12,200
- Head of Household: $18,350
Last year, many taxpayers previously accustomed to itemizing deductions found they’d get a bigger tax break by claiming the standard deduction. If you were right on the cusp last year, you might want to calculate your tax return both ways – once itemizing and again using the standard deduction – to see which will give you a lower tax bill for 2019.
2. There’s a Limit to the Amount of State & Local Taxes You Can Deduct
While you’re adding up your itemized deductions, remember that tax reform put a cap on state and local tax deductions.
Under the previous rules, taxpayers could deduct 100% of:
- Their state and local property taxes
- Either their state income tax or sales tax
Starting with 2018 returns, the deduction for state and local taxes — known as SALT deductions – is capped at $10,000.
That’s a significant change for taxpayers in high-tax states like California, Connecticut, Maryland, New Jersey, and New York. However, if you live in a state with comparatively low income and property taxes, you may not notice a difference at all.
3. Your Home Mortgage Interest Deduction May Be Limited
If you pay interest on a home mortgage, home equity loan, or home equity line of credit, tax reform may have impacted the amount of interest you can deduct.
Before the TCJA, taxpayers could deduct interest on up to $1 million of home mortgage debt. Taxpayers could also deduct interest on up to $100,000 of home equity debt no matter how they used proceeds of the home equity loan or line of credit. Starting with 2018 returns, the government caps the deduction for home mortgage interest at interest paid on up to $750,000 of debt.
Tax reform also eliminated the deduction for interest paid on home equity debt. However, if you used the home equity loan or line of credit to “buy, build or substantially improve” your home, you can still deduct the interest payments. The $750,000 cap applies to the combined total of your first mortgage and any home equity debt.
If you pay private mortgage insurance (PMI) along with your mortgage payments, the Consolidated Appropriations Act of 2020 revived an old tax break you might have missed last year. A tax provision that allowed homeowners to deduct PMI expired at the end of 2017. But the new law, passed in the last days of 2019, extended the deduction through 2020. It also made it retroactive for 2018. If you would have benefitted from claiming this deduction on last year’s return, you can amend your previously filed return.
4. You Lost Some Miscellaneous Itemized Deductions
Before tax reform, taxpayers could claim certain miscellaneous itemized deductions as long as their total miscellaneous itemized deductions exceeded 2% of their adjusted gross income.
Miscellaneous itemized deductions subject to this 2% floor included:
- Tax preparation fees
- Investment expenses
- Job search costs
- Hobby expenses
- Safe-deposit box fees
- Unreimbursed employee expenses
Many taxpayers didn’t have enough deductions to meet this 2% threshold and benefit from the deduction. However, the loss of these deductions was a significant disadvantage for employees with a home office or those who use their personal vehicle for work. Under the TCJA, self-employed people can continue deducting home office expenses and work mileage as business expenses. But employees no longer receive a tax break for these out-of-pocket work expenses.
Some miscellaneous deductions remain, including qualified disaster losses and gambling losses. For more information on available miscellaneous itemized deductions, check out the IRS Instructions for Schedule A.
5. Your Personal Exemption Is Gone, But the Child Tax Credit Is More Generous
Before the 2018 tax year, the IRS allowed taxpayers to claim a personal exemption for themselves and any qualifying dependents, such as their children. In 2017, each exemption was worth $4,050. Tax reform eliminated the personal exemption, but it expanded the child tax credit and added another tax credit for other dependents.
The child tax credit used to be worth $1,000 per dependent child under the age of 17. Starting in 2018, the credit is now worth $2,000 per child for a maximum of three children. Up to $1,400 of the child tax credit is now also refundable, meaning if it brings your tax liability to zero, you can get up to $1,400 in the form of a tax refund above and beyond any tax you paid in. This credit is available until the year the child turns 17.
The credit for other dependents is available for dependents who don’t qualify for the child tax credit, such as college students or dependent parents. The credit is worth up to $500 per qualifying dependent.
If you provide more than half of the support for a child or an elderly parent, familiarize yourself with the rules for claiming a dependent. You can’t claim a $4,050 exemption, but one of these tax credits might help lower your 2019 tax bill.
6. You Probably Can’t Deduct Moving Expenses
Did you make a long-distance move for work in the past year? Unless you’re active-duty military, don’t expect a tax break this year.
Before tax reform, taxpayers who moved for a new job could deduct their moving expenses, including the cost of travel and transporting household goods and personal effects. If an employer reimbursed for those expenses, the IRS considered them a tax-free fringe benefit that didn’t count toward the employee’s taxable income.
Starting with 2018 returns, both the moving expense deduction and the tax-advantaged treatment of moving expense reimbursements went away for everyone except active-duty members of the U.S. armed forces.
Your ultimate tax bill depends on many factors, so it’s tough to say precisely how the TCJA’s changes will impact your 2019 tax bill. Many taxpayers can save time and money by using the higher standard deduction since they no longer need to track each itemized deduction, maintain documentation, and file a Schedule A. That could mean less time spent planning for and preparing your return or using a do-it-yourself tax prep software like TurboTax instead of hiring a tax professional.
Were you surprised by how tax reform impacted last year’s tax year return? How do you think you’ll fare for 2019?