January 6, 2019
As the 2019 filing season is just about here this is a good time for a reminder concerning the changes to the 2018 itemized deductions.
Here is an overview of the changes:
Taxes – Total real estate and state and local income taxes/general sales taxes are limited to $10,000.
Interest
– Home equity loan, home equity line of credit or second mortgage interest is only deductible if it was used to buy, build or substantially improve the home (main or second) that secures the loan.
– Home mortgage interest is limited to $750,000 for homes purchased on or after December 15, 2017. The limit remains at $1,000,000 for homes purchased before that date.
– Home mortgage interest remains deductible for interest paid on loan secured by the taxpayer’s main or second home.
Personal casualty losses are only deductible if the loss was incurred in a federally declared disaster area.
– The FEMA disaster declaration number will now be required to be entered on Form 4684 (Casualties and Theft).
Miscellaneous itemized deductions subject to the 2% AGI floor are no longer deductible. This includes the Employee Business Expenses that were reported on Form 2106.
Medical expense AGI threshold is 7.5% for 2018 for all taxpayers.
Itemized deductions are no longer limited for higher income taxpayers.
Charitable Contributions
– The AGI limitation is now 60% of AGI.
– Payments made in exchange for college athletic seating rights are no longer deductible.
For more details see the final 2018 Schedule A and instructions on the IRS Website.
Also, see IRS Publication 5307 (Tax Reform Basics: For Individuals and Families) for more information on the itemized deduction changes and other tax law changes that will affect individuals this filing season.
Qualified Business Income Deduction
Meanwhile, the Tax Cuts and Jobs Act included a provision that may allow an individual to deduct 20% of their domestic qualified business income from a partnership, S Corporation or sole proprietorship (Schedule C or F). This provision is in effect for tax years 2018 – 2025.
For the vast majority of taxpayers (90%) this deduction is calculated as the lesser of:
20% of their net business income or
20% of their taxable income excluding capital gains
This means that for most taxpayers, the deduction is calculated based on the Simplified Worksheet on page 37 of the 2018 Form 1040 instructions.
For the remaining 10% of taxpayers whose income exceeds $157,500 ($315,000 for joint filers) the deduction will be limited as follows:
For “specified service businesses” the deduction begins to be phased out once the income limit is reached.
– Specified Service business is defined on page 34 of the 2018 Form 1040 instructions.
For all other businesses the deduction is limited to:
– 50% of the W-2 wages paid by the business or
– 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of all qualified property
For these taxpayers the deduction is calculated based on worksheets in the newly revised draft 2018 IRS Publication 535 (Qualified Business Income Deduction).
See the Business owners can claim a qualified business income deduction page on the IRS website for more information.
To help you navigate through the 2019 filing season, contact Louis Mamo & Company today.