Despite the fact that the majority of the TCJA provisions entered into effect a few years ago, the 2017 law continues to have a substantial impact on income and deduction planning. For example, the TCJA generally reduced tax rates, and when rates are lower, deductions save less tax. Many deductions were either decreased or eliminated as a result of the TCJA. However, some CARES Act additions to a few deductions have been extended, and more tax benefits may be enhanced before the end of the year. Tax savings can be maximized by properly timing deductible expenses and taking advantage of other tax benefits.
Itemized Deductions for 2021 vs. Standard Deductions
Depending on their filing status, taxpayers can choose itemized deductions for 2021 or take the standard deduction. Itemized deductions for 2021 when the total is greater than the standard deduction saves money on taxes, but also complicates the filing process.
For each filing status, the TCJA roughly doubled the standard deduction. Those amounts will be increased for inflation every year until 2025, when they will revert to pre-TCJA levels.
Because of the larger standard deduction and the reduction or elimination of numerous itemized deductions for 2021, some taxpayers who previously profited from itemizing now are better off taking the standard deduction.
Deduction for state and local taxes
The TCJA limits your itemized deduction for state and local taxes — including property tax and the greater of income or sales tax — to $10,000 ($5,000 if married filing separately) through 2025. The possibility of raising or removing the cap has been addressed. For the most up-to-date information, consult your tax advisor.
If you live in a state with no or minimal income tax, or if you bought a significant item like a car or boat, deducting sales tax instead of income tax may be advantageous.
In your tax planning, take into account both deductions and exclusions:
Deduction for property taxes. As previously stated, unless proposed tax law changes become law, your property tax deduction will be subject to the state and local tax deduction limit until 2025.
Interest on a mortgage is deductible. Interest on mortgage debt incurred to purchase, build, or improve your principal property and a second residence is normally deductible as an itemized deduction. Points paid on your primary residence may also be deducted. With several exceptions, the TCJA cuts the mortgage debt maximum from $1 million to $750,000 for debt incurred after December 15, 2017 ($500,000 and $375,000 for separate filers, respectively) through 2025.
Interest on home equity debt is deductible. The TCJA essentially limits the home equity interest deduction to debt that would otherwise qualify for the mortgage interest deduction until 2025.
(Prior to the TCJA, interest on up to $100,000 of home equity debt was deductible for any reason, including paying off credit card debt or buying a car.)
Deduction for a home office. Even if your employer has required you to work from home during the pandemic, home office expenses aren’t deductible under the TCJA until 2025 if you’re an employee. Why? This is a miscellaneous itemized deduction for employees that is subject to a 2 percent of adjusted gross income (AGI) floor, and such deductions were suspended under the TCJA. (You may still be eligible to deduct home office expenses if you’re self-employed.)
Loss deduction for personal injury and theft. Unless the loss was caused by an officially declared disaster, the TCJA suspends this itemized deduction until 2025.
Rental income is not taxed. You don’t have to record the revenue if you rent out all or part of your primary residence or second property for less than 15 days during the year. However, expenses such as advertising and housekeeping that are directly related to the rental are not deductible.
Gain from the sale of a home is excluded. If you fulfill certain criteria, you can exclude up to $250,000 in gain ($500,000 for married couples filing jointly) when you sell your primary house. Warning: Gain attributed to a period of “nonqualified” use isn’t usually excludable.
Deduction for losses. If you sell your house at a loss and part of it is rented out or used entirely for your business, you may be eligible to deduct the loss attributable to that portion.
Deduction for moving costs. Only active-duty members of the Armed Forces (and their spouses or dependents) who move because of a military order that calls for a permanent change of station can deduct work-related moving expenditures under the TCJA through 2025. (You don’t have to itemize to claim this deduction if you’re eligible.)
Health-care savings that are tax-advantaged
You can take an itemized deduction for medical expenses that exceed a particular percentage of your AGI and are not paid through tax-advantaged accounts or reimbursable by insurance.
New! The 7.5 percent floor (which had been a temporary drop from 10 percent in recent years) was made permanent in late 2020.
Health insurance premiums, long-term-care insurance premiums (with limits), medical and dental services, and prescription medicines are all examples of eligible expenses. Mileage driven for medical reasons can also be deducted — at a rate of 16 cents per mile in 2021.
If it would help you exceed the applicable floor and you’d have enough total itemized deductions to benefit from itemizing, consider bundling elective medical procedures (and any other services and purchases whose timing you can control without jeopardizing your or your family’s health) into alternating years.
Contributing to one of these accounts may allow you to save taxes without having to worry about the medical cost deduction floor:
HSA. You can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,600 for self-only coverage and $7,200 for family coverage (plus $1,000 if you’re age 55 or older) in 2021 if you’re covered by a qualified high-deductible health plan. HSAs can earn interest or be invested, and they grow tax-free like an IRA. Withdrawals for approved medical costs are tax-free, and the account can be carried over from year to year to allow it to grow.
FSA. You can put pretax money into an employer-sponsored Flexible Spending Account up to a limit set by the company, which in 2021 is $2,750. Qualified medical expenses are paid or reimbursed by the plan. (If you have an HSA, your FSA can only be used to cover specified expenses.) You normally lose anything you don’t utilize by the end of the plan year, though your plan may provide you a 2 1/2-month grace period to use up the previous year’s contribution.
New! Under the CAA, your plan may allow you to roll over all unused amounts to 2022.
Keep in mind that legislation could be passed into law suspending or changing some of the TCJA’s deduction provisions, as well as making other modifications to deduction regulations. For the most up-to-date information, consult one of our tax advisors or subscribe to our blog.
Also keep in mind that other taxes, such as the alternative minimum tax, may apply to you and should be considered in your preparation. Our tax advisors can help you determine if you’re among the small number of taxpayers who still need to plan for the AMT after the TCJA.