The Tax Cuts and Jobs Act (TJCA) was signed into law in 2017. The act nearly doubled the standard deduction and eliminated or limited many itemized deductions. The effect of the tax reform was that many people who used to itemize on Schedule A took the standard deduction instead. Below is a list of exemptions, deductions, and credits that were eliminated, limited, reduced, or changed by the passage of the TCJA.
- The Tax Cuts and Jobs Act eliminated or limited many deductions, credits, and limits, including the standard deduction, until Dec. 31, 2025.
- Personal and dependent exemptions are now obsolete, although the Child Tax Credit remains.
- Eliminated deductions include moving expenses and alimony, while limits were placed on deductions for mortgage interest and state and local taxes.
- Key expenses that are no longer deductible include those related to investing, tax preparation, and hobbies.
- Gambling expenses are deductible, and the threshold for charitable deductions increased.
Exemptions and Credits
Exemptions and deductions reduce the amount of taxable income you claim on your annual tax return. Tax credits are subtracted from the taxes you owe. All three of these elements were impacted by the TCJA, and each affects the amount you pay in a different way.
For example, let's say you're a single filer whose taxable income is $100,000. This means you fall into the 24% tax bracket. Using the tax computation worksheet provided by the Internal Revenue Service (IRS), you owe $18,021 for 2021. A $10,000 deduction (or exemption) would reduce your income to $90,000, resulting in a tax bill of $15,627. With a tax credit of $10,000, your AGI would remain at $100,000, but your taxes would be just $8,021—the amount you get by subtracting $10,000 from $18,021.
The new law suspended personal and dependent exemptions between 2018 and 2025. Though an exemption is not technically a deduction, it functions the same way by allowing you to reduce your taxable income by the amount of the exemption. In this case, say the exemption was $4,050 for yourself and for each dependent you claim. Now, it is zero. Keep in mind, though, that even though you can't claim a personal or dependent exemption, you may be eligible for other tax benefits.
Child Tax Credit
The TCJA doubled the child tax credit (CTC) from $1,000 to $2,000 for those who qualify, including parents with higher incomes than in the past. That limit was increased again for the 2021 tax year to $3,000 for children ages six through 17 and $3,600 for children under the age of five. Income thresholds for 2021 are $200,000 for single parents and $400,000 for those married filing jointly.
The child tax credit is refundable, which means that even if you don't owe taxes due to low income, you can still receive partial credit, providing (or increasing) a refund. Remember, this is a tax credit so this comes directly off the total taxes you owe. In addition, a new $500 tax credit is available for dependents aged 17 and older.
The child tax credit is now fully refundable. Prior to this, only $1,400 of the credit was refundable. These changes are part of the American Rescue Plan Act of 2021 and are effective only for the 2021 tax year unless extended by an additional act of Congress. It is phased out for singles with incomes above $75,000 and couples with incomes above $150,000.
Higher Standard Deduction
The TCJA raised the standard deduction for taxpayers. Single filers can claim a standard deduction of $12,550 in 2021 and $12,950 in 2022. For married couples filing jointly, the deduction is $25,100 in 2021 and $25,900 in 2022. These are nearly double the rates prior to the TCJA.
The federal income tax system and some states have higher standard deductions for people who are at least 65 years old and for people who are blind. Under federal guidelines, if you are blind or 65 or older and single, your standard deduction goes up by $1,700 for 2021 and $1,750 in 2022. If you are married filing jointly and one of you is 65 or older, your standard deduction goes up by $1,350 in 2021 and $1,400 in 2022.
Regardless of your age, you may discover that the new standard deduction is larger than the combined total of your itemized deductions, even if you deduct mortgage interest. What follows is a closer look at how Schedule A itemized deductions have changed with the TCJA. In some cases, there are also some suggestions for what to do instead.
The estimated percentage of filers who took the standard deduction instead of itemizing for tax year 2018.
Commuter Tax Benefits
In the past, your employer could reimburse you up to $20 a month or $240 annually for bicycle commuting expenses on a tax-free basis. In addition, your employer could take a deduction for offering the benefit. The TCJA suspended that benefit for both bike commuters and their employers. It also removed employer deductions for parking, transit, and carpooling.
Commuting expenses considered "necessary for ensuring the safety of the employee" will continue to be deductible by employers, but the TCJA doesn't spell out which expenses qualify, and the IRS has offered no real guidance to date.
Employees continue to receive tax-free benefits for parking, transit, and carpooling from their employers. The exclusion amounts are $270 per month for 2021 and $280 per month for 2022.
However, because companies no longer receive a deduction for offering the benefit, most have little incentive to offer it. Your employer can also offer bicycle-commuting benefits in any amount and this expense is deductible.
Moving Expenses Deduction
Costs associated with relocating for a new job used to be deductible on Form 1040 as an above-the-line deduction, which you could subtract from your gross income to calculate your adjusted gross income (AGI). Unfortunately, this no longer applies. In fact, the distance you move doesn't even matter. Moving expenses are simply not deductible. The only exception is if you are active-duty military and moving for a service-related reason. In this case, the deduction still applies.
In the past, the person making alimony payments received an above-the-line deduction, and the person receiving the alimony counted the money as taxable income. As of 2019, the paying spouse no longer receives a deduction and the receiving spouse no longer declares the payments as taxable income for any divorce that occurred after Dec. 31, 2018. Payments initiated before 2019 are not affected. Child support payments are also nondeductible by the paying spouse and tax-free to the recipient.
Gift an IRA
One suggested tactic for the paying spouse involves giving the receiving spouse a lump-sum individual retirement account (IRA). This effectively provides the paying spouse with a deduction because they are giving away money they would have had to pay taxes on eventually.
The receiving spouse would be responsible for taxes upon withdrawal (including a 10% penalty if money is withdrawn before age 59½) but would have the benefit of tax-free growth until withdrawing funds. The transfer of the IRA account is tax-free.
Obviously, this would not be ideal if the receiving spouse needs money right away.
Medical Expenses Deduction
The deduction for medical expenses remains. For 2021, you can deduct unreimbursed medical expenses that exceed 7.5% of your AGI on Schedule A. This deduction originally reverted back to a 10% AGI threshold, but that changed with a law signed on Dec. 20, 2019. The deduction is claimed on Lines 1–4 of Schedule A.
Keep in mind that the medical expense must be qualified deductible expenses. Most cosmetic surgeries do not qualify.
SALT Taxes Deduction
The Schedule A deduction for state and local taxes (SALT) used to be unlimited. These include income taxes (or general sales taxes), real estate, and personal property taxes. With the passage of the TCJA, the SALT deduction is now limited to $10,000 ($5,000 if married and filing separately).
This can be a real problem for people in states with high income or property taxes, such as New York and California.
States Fight Back
Some states had sought to offset the cap by allowing residents to contribute to a state charitable fund in lieu of taxes. The payments could then be deducted as charitable contributions on federal returns. But in June 2019, the Department of Treasury and the IRS issued final regulations curtailing the practice.
Four states launched a constitutional separate challenge to the SALT cap. These efforts also failed when a federal court dismissed the lawsuit in September 2019.
New York adopted a workaround called the Employer Compensation Expense Tax, a voluntary employer-side tax designed to create a tax credit for workers. The move takes advantage of the fact that businesses have no cap on deducting state and local taxes. For the 2020 tax year, 311 employers participated in the program.
Connecticut enacted its mandatory Pass-Through Entity Tax Credit, which creates a tax on pass-through entities while also providing a tax credit for the entity's partners.
Foreign Property Taxes
The TCJA eliminates the deduction for foreign taxes paid on real estate. Previously, you could deduct foreign property taxes on Schedule A just as you can in the United States, either for a regular residence or a second home.
Qualified Housing Expense
Foreign property taxes may now be considered a deductible qualified housing expense on Form 2555, Foreign Earned Income, for purposes of the foreign housing exclusion for certain U.S. citizens or residents who live outside the United States and earn wages abroad. Qualified housing expenses include rent, utilities (other than phone charges), residential parking, furniture rental, and other items.
This deduction involves an interpretation of tax law. Don't try it without consulting a qualified tax expert.
Mortgage Interest Deduction
In the past, you could deduct interest on mortgage debt of up to $1 million ($500,000 for married taxpayers filing separately). This still applies to any loan originated on or before Dec. 16, 2017. But if you originated a new mortgage after that date, the new limit of $750,000 applies ($375,000 if married and filing separately).
Because you can only take the mortgage interest deduction if you file Schedule A and itemize, the change does not matter to people who take the standard deduction.
HELOC Interest Deduction
Previously, you could deduct interest on a home equity loan and home equity line of credit (HELOC) just as you could with a mortgage, no matter how you used the money. This deduction has gone away, at least in part. Since 2018, you cannot deduct interest on these types of loans except under certain circumstances, even if you took out the loan before that year.
If you have or take out a home equity loan or line of credit and use the money to buy, build, or substantially improve your main or second home, the interest may still be deductible.
Note that to take the deduction, the home equity loan must be on the property you are renovating. You can't take out a home equity loan on your city apartment to finance fixing up your ski house. You can also refinance an existing mortgage and deduct the interest, provided the refinanced amount isn't greater than your old loan balance (in other words, provided you are not taking any cash out).
Mortgage Insurance Deduction
Though it’s not specifically related to the TCJA, the Schedule A deduction for mortgage insurance premiums/private mortgage insurance (MIP/PMI) expired at the end of 2017. However, a law signed on Dec. 20, 2019, extended the deduction through 2020. The deduction is claimed on Line 8d of Schedule A.
Casualty, Theft Deduction
The comprehensive Schedule A deduction for casualty and theft losses went away following the passage of the TCJA. In the past, you could deduct losses related to a disaster or theft to the extent that those losses were not covered by insurance or disaster relief.
The deduction is still available if you live in a federally designated disaster zone. Often, these designations are made county by county, so even if the county next to you is a federally declared disaster area, your county may not be.
Miscellaneous Itemized Deductions
Miscellaneous Schedule A itemized deductions subject to a 2% of AGI threshold went away in 2018. This includes deductions in the following categories:
- Unreimbursed Job Expenses. These are work-related expenses you paid out of your own pocket and include travel, transportation, and meals, union and professional dues, business liability insurance, depreciation on office equipment, work-related education, home office expenses, costs of looking for a new job, legal fees, work clothes, and uniforms. All of these are gone. Your best recourse is to ask your employer to reimburse you for these expenses. The reimbursement will be tax-free. You could also ask for a pay raise, but that would be taxable.
- Investment Expenses. These are fees for investment advice or management, tax or legal advice, trustee fees (i.e., to manage IRAs or other investments), or rental fees for a safe deposit box. Although the items above are no longer deductible, if you borrow money to buy an investment, interest on that loan (called investment interest) is deductible if you itemize. The deduction is limited to the amount of taxable investment income you earn for the year.
- Tax Preparation Fees. These include the cost of tax preparation software, hiring a tax professional, or buying tax publications. Also gone are deductions for electronic filing fees and fees you pay to fight the IRS, including attorney fees, accounting fees, or fees you pay to contest a ruling or claim a refund. If you hire someone to prepare both your personal and business taxes, ask for a separate bill for each. Fees you pay to prepare your business return are fully deductible as a business expense.
- Hobby Expenses. These expenses, up to the amount of income you earned each year, are no longer deductible even though you do have to report (and pay taxes on) any income you earn from your hobby. If you sell goods related to your hobby to customers, you can deduct the cost of those goods when calculating hobby-related income.
Itemized Deductions Still Available
A few miscellaneous itemized deductions remain after 2018:
- Gambling losses are still deductible under the TCJA up to the amount of your winnings for the year. Gambling losses are not subject to the 2% limit on miscellaneous itemized deductions.
- Interest on student loans continues to be tax-deductible ($2,500 or the amount of interest you pay during the year—whichever is lower) even if you don’t itemize deductions.
- The $250 classroom teacher deduction for classroom teachers is still in effect and available, even if the teacher doesn't itemize.
- The standard mileage rate deduction for Armed Forces members was 16 cents per mile in 2021 and 18 cents for 2022. For charity, the rate was 14 cents for 2021 and 2022.
Note to Teachers
Teachers can still deduct unreimbursed educational expenses up to $250 per year. Moreover, these expenses may include COVID-19 protective items purchased since March 12, 2020, according to new IRS guidance.
Along with the new standard deduction, several others are better under the TCJA.
- The estate tax exemption is $11.7 million in 2021 and $12.06 million in 2022.
- Student loan debt discharge due to death or disability has not been taxed since 2018. Previously, discharged debt due to disability or death was taxable to you or to your estate.
- Itemized AGI deductions are subject to no limitations because of the TCJA, although other limitations may be imposed, depending on the deduction.
- Charitable contributions now include higher limit thresholds. Most gifts by cash or check can be up to 60% of your AGI versus the previous limit of 50%.
The Bottom Line
Whether deductions eliminated by the TCJA or other changes have a negative impact on you depends on your personal financial situation and the types and amounts of deductions you might be able to take. It's worth noting that the changes implemented by this legislation are currently set to expire after Dec. 31, 2025, unless Congress decides to extend them. The IRS's Tax Reform: Basics for Individuals and Families publication offers more information.