2019 Tax Filing Season (2018 Tax Year): Itemized Deductions

2019 Tax Filing Season (2018 Tax Year): Itemized Deductions

link to page 1

February 4, 2019
2019 Tax Filing Season (2018 Tax Year): Itemized Deductions
P.L. 115-97, often referred to as “The Tax Cuts and Jobs
97. Historically, the chained CPI has grown at a slower rate,
Act” (TCJA), temporarily changed some personal income
because it allows for consumer substitutions in the prices of
tax deductions taxfilers will claim for tax years 2018
goods and services used to calculate inflation.
through 2026. This In Focus explains the changes made to
itemized deductions in P.L. 115-97 and their potential
Because of the larger standard deduction and the limit or
impacts.
repeal of some itemized deductions, some taxfilers might be
better off claiming the standard deduction in 2018 even if
For more details about the changes enacted by P.L. 115-97,
they itemized in the past.
see CRS Report R45092, The 2017 Tax Revision (P.L. 115-
97): Comparison to 2017 Tax Law, coordinated by Molly F.
Before 2018, taxfilers were allowed to claim an unlimited
Sherlock and Donald J. Marples.
deduction for state and local income or sales taxes paid, as
well as property taxes paid. In 2018, those deductions are
Summary of Current Law
limited to a combined amount of $10,000 per taxfiler,
Individual tax filers have the option to claim the standard
regardless of filing status.
deduction or itemize their tax deductions, typically
choosing whichever provides the larger tax benefit.
Additionally, the deduction for mortgage interest was
Itemized deductions are available for a diverse set of
limited. In 2017, a homeowner was allowed an itemized
activities, such as mortgage interest, charitable giving, state
deduction for the interest paid on the first $1 million of
and local sales or income taxes, real property taxes, and
combined mortgage debt associated with a primary or
unreimbursed medical expenses. Itemized deductions are
secondary residence. A homeowner was also allowed to
distinguished from “above-the-line” deductions (e.g., IRA
separately deduct the interest paid on the first $100,000 of
contributions, student loan interest) that can be claimed
home equity debt regardless of whether or not the taxpayer
regardless of whether a taxfiler itemizes or claims the
incurred the debt to finance costs associated with the home.
standard deduction.
Starting in 2018, the amount of interest that is deductible
depends on when the mortgage debt was incurred. For
Comparison to Prior Law
mortgage debt incurred on or before December 15, 2017,
Among some of the major changes in individual income
the combined mortgage limit is $1 million. For mortgage
taxes for 2018 are the increased standard deduction
debt incurred after December 15, 2017, the deduction is
amounts. Table 1 compares the standard deduction amounts
limited to the interest incurred on the first $750,000 of
that would have been in effect for 2018 pre-P.L. 115-97 and
combined mortgage debt. Homeowners may still deduct
the actual amounts for 2018 under P.L. 115-97. As a result,
interest on home equity loans, but the proceeds of that loan
more taxpayers will be better off claiming the standard
must be (or have been) used to improve the home (e.g.,
deduction rather than itemizing.
paying for a child’s college is not allowed), and the
taxpayer’s total debt—including their home equity loan—
Table 1. Standard Deduction Amounts, 2018
must be below the applicable mortgage limit ($750,000 or
$1 million). These limitations apply for taxable years 2018
Under Pre-
Post-TCJA
through 2025. For more details, see CRS In Focus IF11063,
Filing Status
TCJA Law
Current Law
2019 Tax Filing Season: The Mortgage Interest Deduction,
Single (Unmarried)
$6,500
$12,000
by Mark P. Keightley.
Married Filing
$13,000
$24,000
Several other itemized deductions that affected narrower
Jointly
groups of taxfilers were also repealed beginning in 2018,
Married Filing
$6,500
$12,000
such as deductions for: personal casualty losses—except for
losses associated with federal disaster declarations—and all
Separately
miscellaneous itemized deductions subject to the 2% of
Head-of-
$9,550
$18,000
adjusted-gross-income (AGI) floor (including unreimbursed
Household
employee expenses). The floor for the medical expenses
Source: IRS Rev. Proc. 2018-18, May 5, 2018, https://www.irs.gov/
deduction, though, was temporarily reduced from 10% to
7.5% of AGI for 2017 and 2018.
pub/irs-irbs/irb18-10.pdf; and IRS Rev. Proc. 2017-58, November 6,
2017, https://www.irs.gov/irb/2017-45_IRB.
The deduction for charitable contributions was basically
unchanged, except for increasing the percentage of AGI
These amounts, though, are permanently indexed for
inflation using the “chained” Consumer Price Index (CPI)
that can be given as cash to qualifying organizations from
instead of the “unchained” or traditional CPI, pre-P.L. 115-
https://crsreports.congress.gov

link to page 2 2019 Tax Filing Season (2018 Tax Year): Itemized Deductions
50% to 60%. Maximum cash donation limits to private
receive a tax benefit for that activity on the margins. The
foundations remain unchanged at 30% of AGI.
economic literature shows, however, that charitable giving
is reasonably unaffected to tax incentives. Many individuals
For high-income filers, the “Pease” limitation on itemized
give because they enjoy the “warm glow” they receive from
deductions was also repealed. This provision effectively
supporting such organizations or benefit indirectly from the
acted like a surtax, triggered by income and not by the
activities funded by their donations. Some taxfiler strategies
amount of deductions claimed.
that have been discussed for maximizing tax benefits and
supporting charitable organizations include “bunching”
Economic and Budgetary Impact of the
larger quantities of deductions in certain years (such that
Changes
the sum of itemized deductions exceeds the standard
Before P.L. 115-97, roughly one-third of taxfilers chose to
deduction), possibly in conjunction with the use of donor-
itemize their deductions instead of claiming the standard
advised funds (DAFs). A taxpayer contributes to a DAF,
deduction, according to historical IRS data. The rate of
taking a tax deduction in that year. The contributions to a
itemization increased with income.
DAF can grow tax-deferred if invested in an investment
fund (which are structured like mutual funds, with various
As shown in Table 2, the Tax Policy Center estimated that
rates of return based the riskiness of the underlying
10.9% (19.3 million) taxfilers would itemize in 2018
portfolio). The DAF then deposits the contribution to the
compared to a projection of 26.4% (46.5 million) under
targeted, eligible 501(c)(3)s, typically according to the
prior law and that the rates of itemization within income
donor’s preferences. In other words, bunching contributions
classes will drop significantly except for taxfilers in the
intermediated through a DAF can provide benefits to
highest income classes.
taxfilers while still “smoothing out” cash flow to charities.
Table 2. Percent of Itemizers Within Income Classes,
Economic studies indicate that the rate of itemization is
Projected Pre- and Post-TCJA, 2018
unlikely to affect the decision to purchase a home but could
affect the size of the mortgage taken out by a taxpayer. The
Under Post-
decision to buy versus rent is a decision that is typically
Income Level
Under Pre-
TCJA Current
driven by more long-term concerns (e.g., job status,
(thousands of $)
TCJA Law (%)
Law (%)
decision to start a family) rather than tax benefit. Once the
Less than $10
**
**
decision to buy a home has been made, though, the ability
to deduct interest on a mortgage could affect the amount of
10-20
0.7
0.2
indebtedness that the taxfiler takes out on the margins. This
could affect the prices of homes sold post-P.L. 115-97.
20-30
2.5
0.7
30-40
6.6
1.9
In contrast, limiting the deduction on state and local taxes
(or the “SALT” cap, as it is commonly known) is typically
40-50
12.4
3.9
beyond the short-term control of any given taxfiler. The
50-75
23.1
7.0
$10,000 SALT cap is projected to affect a higher share of
taxfilers in high-tax states and high-income taxfilers
75-100
36.6
13.3
(generally) in states with income taxes. In the long term,
100-200
61.3
23.3
though, some taxfilers might choose to live in certain areas
with lower tax rates or negotiate for higher salaries to
200-500
88.6
47.3
compensate for higher costs of living. These considerations
500-1,000
94.1
72.5
will be made alongside other factors when deciding to live
within a particular jurisdiction. State and local governments
More than 1,000
92.5
82.1
might also consider the limitation on this implicit federal
All taxfilers
26.4
10.9
subsidy as they consider the most appropriate tax rates they
impose in a world post-P.L. 115-97.
Source: Tax Policy Center, Table T18-0001, January 11, 2018,
https://www.taxpolicycenter.org/model-estimates/impact-itemized-
The Joint Committee on Taxation estimated that increasing
deductions-tax-cuts-and-jobs-act-jan-2018/t18-0001-impact-number.
the standard deduction amounts would lose $720.4 billion
Notes: ** indicates insufficient data. Income levels are valued in 2017
over 10 years. In contrast, various limits and repeal of
dol ars.
certain itemized deductions would raise $668.4 billion over
10 years, including the SALT cap, limiting the interest
The reduced rate of itemization projected under P.L. 115-97
deduction for mortgage indebtedness to $750,000, repealing
has sparked debate as to whether activities that are
the deduction for home equity debt, repeal of non-declared
encouraged by the deductions will also decrease. This
disaster casualty losses, repeal of miscellaneous itemized
concern has focused mostly on the deductions for charitable
deductions, and repeal of the Pease limitation.
contributions and mortgage interest, as they are frequently
claimed by itemizers and are more likely to be within the
Sean Lowry, Analyst in Public Finance
control of the taxfiler.
IF11091
Although the deduction for charitable contributions was
unchanged, fewer people could choose to give to charity or
reduce the amount they give to charity if they cannot
https://crsreports.congress.gov

2019 Tax Filing Season (2018 Tax Year): Itemized Deductions

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11091 · VERSION 2 · NEW