As federal employees and retirees collect their 2018 tax records and information in preparation to file their 2018 federal and state tax returns that are due April 16, 2019, they should be aware that several tax deductions available in 2017 have been eliminated or reduced for 2018.
This column presents the top 10 tax deductions that are being eliminated or limited. It is important to note that these eliminations and deductions will be in effect for tax years 2018 through 2025, and became law as a result of the Tax Cuts and Jobs Act of 2017 (TCJA).
The deductions discussed are the more popular provisions that have been eliminated or limited. Federal employees will have to look closely at their own situations to see whether other less common deductions were also eliminated or limited as a result of TCJA’s passage.
1. Personal exemptions
One of the largest changes in TCJA was to eliminate personal exemptions, which generally allowed individuals in the past to reduce their taxable income by $4,050 (2017) per individual. Many members of Congress argued that the personal exemption was essentially merged into the standard deduction which doubled in amount under TCJA for all filing categories. But the rise in the standard deduction under TCJA may not be large enough to compensate for the loss of personal exemptions for those individuals who itemize on their tax returns.
2. Limitation of state and local taxes, real estate taxes and personal property taxes to $10,000
For employees who itemize on their tax returns and include state and local income or sales taxes, real estate taxes and personal property taxes as part of their itemized deductions (Schedule A), TCJA limits this deduction to $10,000. The $10,000 limitation applies to all filing statuses (single, head of household, married filing jointly or separately) and no matter where an individual lives. The limitation particularly affects Federal employees living in states with high income taxes and/or high real estate taxes.
3. Home equity loan interest
For those individuals who itemize on their taxes and who own homes, the mortgage interest paid on first and second/vacation homes remains deductible. This is provided that the mortgage principal is less than $1 million for mortgage taken out before Dec. 16, 2017 and less than $750,000 for mortgages taken out after Dec. 15, 2017. Interest deductions for home equity loans becomes nondeductible effective Jan. 1, 2018, unless the home equity loan proceeds are used to buy, build, or improve one’s principal residence (first home). Unlike mortgages on first and second homes, there is no grandfathering provision for existing home equity loans in which the loan proceeds are not used to buy, build or improve one’s principal residence. This means that for those individuals for whom the home equity loan deduction has been important in the past and the interest is no longer deductible, looking at repaying their home equity loans sooner than expected may be worth considering.
4. Moving expenses
The TCJA eliminates the moving expense deduction for 2018 -2025, except for members of the Armed Forces who are on active duty and, due to a military order, move because of a permanent change of station. Before 2018, individuals could deduct moving expenses in connection with a move only when the move was job-related, and a distance and time test were met. The distance and time tests do not apply to moves made by members of the Armed Forces on active duty who move because of a permanent change of station.
5. Casualty and theft losses
Effective Jan. 1, 2018, casualty and theft losses are no longer eligible as itemized deductions to the extent they exceed $100 plus 10 percent of one’s adjusted gross income (AGI). Events included not only natural disasters but also fires, robberies, and thefts. TCJA preserves the deduction but only for disasters for which a presidential disaster area declaration was made. For example, the California wildfires that occurred during October and November 2018 resulted in a presidential disaster area declaration. Homes that were destroyed as a result of those fires could qualify for a casualty loss deduction.
6. Job expenses
Money spent on certain required job expenses such as licenses and regulatory fees, required medical tests and unreimbursed continuing education was available as an itemized deduction to the extent that it and other miscellaneous deductions exceeded two percent of an individual’s adjusted gross income. Job expenses are no longer deductible.
7. Subsidized parking and transit reimbursement
Employees were eligible before 2018 to get up to $255 per month from their employers to subsidize parking costs or transit passes. Employees did not have to include those perks in income, and private companies could deduct the cost of the subsidies. Effective Jan. 1, 2018, the employer deduction for that cost is eliminated. This could lead some businesses to stop offering those programs to employees.
8. Tax preparation fees and the cost of tax preparation software, and other miscellaneous deductions
Just like job expenses, costs to have one’s income taxes prepared were also available as miscellaneous itemized deductions, subject to the two percent AGI limitation. The cost of buying individual tax preparation software such as Turbo Tax was also available as a miscellaneous itemized deduction. A host of other miscellaneous deductions subject to the two percent AGI limitation, including investment expenses and fees, convenience fees for using a credit or debit card to pay one’s taxes, out-of-pocket employee business expenses, and trustee fees for an IRA if paid separately are no longer deductible. Miscellaneous itemized deductions have been eliminated for the years 2018 – 2025.
9. Donations to colleges in exchange for athletic event seats
One controversial provision in the tax code allowed donors to give money to colleges and deduct the full amount, even if they were given tickets or seating rights to athletic events. As a result of TCJA, that perk has been eliminated. Donors will have to reduce their deductions by the fair market value of those tickets.
10. Roth IRA recharacterizations are irreversible
Effective Jan. 1, 2018, pursuant to the TCJA a conversion from a traditional IRA, SEP-IRA, or a SIMPLE IRA to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as from the TSP or from a 401(k) plan. Therefore, a recharacterization cannot be used to unwind a Roth conversion. The new law applies to Roth IRA conversions made after Dec. 31, 2017. However, recharacterization post-Dec. 31, 2017 is still permitted with respect to other contributions. For example, if an individual made a Roth IRA contribution during 2018 and determines before filing his or her 2018 Federal income tax return that his or her 2018 modified adjusted gross income was too large resulting in the disallowance of the Roth IRA contribution, then the individual can recharacterize the contribution as a traditional IRA contribution. There would be no tax due and no penalty provided the recharacterization is performed before April 16, 2019, the due date of the 2018 federal income return.