The Tax Cuts and Jobs Act (TCJA) was a game-changer for many individual taxpayers. Notably, the TCJA suspends or modifies certain deductions while essentially doubling the standard deduction for 2018 through 2025. As a result, millions of taxpayers no longer itemize and are claiming the standard deduction, at least temporarily.
For 2021 returns, the standard deduction is $12,550 for single filers and $25,100 for joint filers. Consider these key TCJA provisions that may affect your filing outlook.
State and local taxes: As was the case prior to the TCJA, an itemized deduction is available for any combination of state and local tax (SALT) payments of (1) property taxes and (2) income taxes or sales taxes. But the total annual SALT deduction can’t exceed $10,000. This is a significant impediment for many taxpayers, especially those in high-tax states, and may result in a switch to the standard deduction. Note: Proposed legislation would repeal the SALT cap, but there’s been no real progress in Congress.
Mortgage interest: Previously, you could deduct mortgage interest paid on the first $1 million of acquisition debt and the first $100,00 of home equity debt. However, the TCJA reduces the threshold for new acquisition debt to $750,000 and eliminates the deduction for home equity debt. Note that a home equity loan may qualify as an acquisition debt if the proceeds are used for home improvements.
Casualty and theft losses: The TCJA suspends the deduction for casualty and theft losses except for losses sustained in an officially-designated federal disaster area. The prior rules for claiming losses, including the floor of 10% of adjusted gross income (AGI), continue to apply. Note: You can elect to deduct a disaster-area loss in the tax year prior to the year of the event.
Miscellaneous expenses: You can’t deduct miscellaneous expenses such as employee business expenses and qualified production-of-income expenses. Previously, the miscellaneous expense deduction was limited to the excess above 2% of adjusted gross income (AGI).
Moving expenses: This deduction claimed “above the line” is no longer available, except for certain military personnel. Furthermore, if a regular employer reimburses an employee for moving expenses, the reimbursements are taxable under the TCJA.
Alimony expenses: The above-the-line deduction for alimony (and the corresponding inclusion in taxable income) is permanently eliminated. But the crackdown generally takes effect for agreements executed in 2019 or thereafter. For instance, if you are paid alimony last year under the terms of a 2018 divorce decree, you may still deduct the payments on your 2021 return.
Medical expenses: Count this one on the plus side. The TCJA temporarily lowered the threshold for deducting unreimbursed medical expenses from 10% of AGI to 7.5% of AGI. Subsequent legislation made this change permanent. This may give you a better shot at a medical expense deduction on your 2021 return.
Finally, in conjunction with other changes, the TCJA suspends the “Pease rule” reducing the tax benefit of certain itemized deductions for high-income taxpayers. Unless Congress takes additional tax action, this rule will be reinstated in 2026. Stay tuned.
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