Gavin Howe
The Tax Cuts and Jobs Act (TCJA) of 2017 has brought about several changes to the standard deduction and itemized deductions. While the standard deduction for 2023 is $13,850 for single filers, $27,700 for married couples, and $20,800 for heads of household, there is no limitation on itemized deductions for tax year 2025. Taxpayers can still deduct state and local real estate, personal property, and either income or sales taxes, with the TCJA capping the total SALT deduction at $10,000. There are also deductions for mortgage interest, charitable contributions, medical expenses, and self-employment expenses. Additionally, eligible taxpayers using the standard mileage rate for travel expenses can deduct 67 cents per mile for the 2024 tax year.
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What You'll Learn
State and local taxes (SALT)
The state and local tax (SALT) deduction allows taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.
The SALT deduction has been a part of the US tax code for over a century. It is a large tax expenditure, meaning it is among the provisions in the tax code that provides a special deduction, credit, exclusion, or other tax preference that wouldn't be included in a "normal" tax code. The Joint Committee on Taxation (JCT) estimated that the deduction for state and local taxes paid would cost the federal government $24.4 billion for 2020.
The TCJA significantly decreased the number of taxpayers claiming itemized deductions and the average tax saving from claiming them. The percentage of taxpayers with a tax benefit from the SALT deduction fell from about 25% in 2017 to 10% in 2018, and the overall tax saving in 2018 was about one-tenth of the saving in 2017.
The SALT cap was established with the passage of TCJA in 2017. Before this, there was no cap on the SALT tax deduction, so taxpayers could deduct 100% of their state and local taxes paid. The SALT cap has stirred much debate, especially within high-tax states, as opponents argued that the SALT cap was unconstitutional. In 2018, the governments of New York, New Jersey, Connecticut, and Maryland filed a lawsuit against the Treasury Department and IRS. The SALT cap, however, was ultimately ruled to be constitutional.
The SALT deduction cap applies to tax years 2018 to 2025 and is set to expire in 2026. In the meantime, several efforts are underway to restore the SALT deduction, including the relaunch of the bipartisan SALT Caucus for the 118th Congress.
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Mortgage interest
The mortgage interest deduction allows you to deduct the interest you pay on your mortgage debt. Taxpayers can still deduct mortgage interest on their primary residence and a second home. However, the deduction is limited to the interest on the first $750,000 of mortgage debt (reduced from $1 million before the TCJA).
To deduct mortgage interest, the mortgage must be a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that makes your ownership in a qualified home security for payment of the debt. In the case of default, your home could satisfy the debt, and it is recorded or otherwise perfected under any applicable state or local law.
If you have a mortgage, keeping good records is important. The interest you pay on your home loan could help reduce your tax bill. Your mortgage lender should send you a Form 1098 in January or February, detailing how much you paid in mortgage interest during the previous year. This form is also sent to the IRS, which will try to match it with what you report on your tax return. You will receive a Form 1098 if you paid $600 or more in mortgage interest during the year.
There are specific situations where you may be able to deduct mortgage interest:
- You used part of the house as a home office.
- You were a co-op apartment owner.
- You rented out part of your home.
- The home was a timeshare.
- Part of the house was under construction during the year.
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Charitable contributions
The charitable contribution deduction is an itemized deduction claimed on Schedule A of the Form 1040 tax return. Taxpayers can deduct charitable contributions made to qualifying organizations under IRC rules. Eligible organizations include religious groups, war veterans' groups, the Salvation Army, United Way, and certain homeless shelters. Donations must be made in cash or other property before the close of the tax year to be deductible. The TCJA increased the limit on deductions for charitable contributions from 50% to 60% of adjusted gross income (AGI).
There are some special rules and considerations for charitable contribution deductions. For example, if you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. However, if the property has appreciated in value, some adjustments may need to be made. Additionally, there is a special rule allowing enhanced deductions for businesses that contribute food inventory for the care of the ill, needy, or infants. The amount of charitable contributions of food inventory that can be deducted is limited to a percentage of the taxpayer's net income or taxable income.
It is important to note that the charitable contribution deduction is subject to various rules and limitations. For instance, deductions for some contributions are limited, and taxpayers must itemize to claim this deduction, which may not always be the most advantageous option. The IRS provides resources to help taxpayers identify qualified organizations, and it is important to keep proper documentation of any charitable contributions made.
Some proposed reforms to the charitable deduction include replacing it with a non-refundable tax credit or modifying it so that taxpayers must contribute a certain percentage of their income to charity to claim it. These reforms aim to offset the cost of extending expiring tax cuts while retaining incentives for charitable giving.
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Medical expenses
Medical and dental expenses are deductible from gross income for yourself, your spouse or domestic partner, and your dependents. These include payments for doctor's visits, dental care, hospital care, eye examinations, eyeglasses, medicine, and x-rays or other diagnostic services directed by your physician or dentist. Insurance premiums, including amounts paid under Social Security for Medicare, can be used as medical deductions. Transportation costs are also deductible, including out-of-pocket expenses for a personal car, such as gas and oil, or the standard mileage rate for medical trips, plus tolls, parking, and taxi, bus, or train fare. Ambulance costs are also included.
If you are self-employed and have a net profit for the year, you may be eligible for the self-employed health insurance deduction, which is an adjustment to income for premiums paid on a health insurance policy covering medical or qualified long-term care for yourself, your spouse, your dependents, and any children under 27. If you don't claim 100% of your paid premiums, you can include the remainder with your other medical expenses as an itemized deduction.
If you itemize your deductions for a taxable year on Schedule A (Form 1040), you may be able to deduct medical and dental expenses to the extent that they exceed 7.5% of your adjusted gross income for the year. This applies only to expenses not compensated by insurance or otherwise. This 7.5% limit does not apply to impairment-related work expenses for people with disabilities.
If you receive a settlement from a personal injury lawsuit that includes medical expenses you deducted in an earlier year, you must include that amount as income in the year you receive it, to the extent that it reduced your taxable income in the earlier year.
In New Jersey, allowable medical expenses include Archer MSA Contributions or a Self-Employed Health Insurance Deduction. Your contribution cannot be more than 75% of your annual health plan deductible (65% for a self-only plan).
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Travel expenses
If you are self-employed, you can deduct travel expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). This includes travel by plane, train, bus, or car between your home and business destination, as well as taxi fares, and the cost of shipping baggage and materials to a temporary work location. If you are using your own vehicle, you can deduct the standard mileage rate, as well as tolls and parking fees, or you can calculate the actual expenses incurred, such as gas, insurance, and parking tickets.
If you are travelling internationally, you can deduct the cost of obtaining a business visa or work permit, as well as international phone calls and roaming charges. If you are attending a business convention outside North America, you must demonstrate that the event is directly related to your trade and that it is reasonable for it to be held at that location.
When it comes to lodging and meals, you can deduct the regular federal per diem rate for these expenses, and you can generally use a standard meal allowance, which varies depending on where you travel. The deduction for business meals is generally limited to 50% of the unreimbursed cost.
It is important to keep detailed records of your expenses, such as receipts, invoices, and cancelled cheques. For travel expenses, it is recommended to use an app to track business expenditure and keep accurate records.
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Frequently asked questions
A tax deduction is an amount you subtract from your income when you file so you don't pay tax on it. By lowering your income, deductions lower your tax.
Some common tax deductions include deductions for state and local real estate, personal property, and either income or sales taxes, mortgage interest, charitable contributions, medical expenses, student loan interest, self-employment expenses, and alimony.
For the 2025 tax year, there are deductions of up to $10,000 for interest payments on car loans, increased contribution limits for health savings accounts, and adjustments to retirement plan contribution limits.
You can claim tax deductions when you file your tax return. Be sure to have the necessary documents to show expenses or losses you want to deduct, and consider consulting a tax professional to ensure you are claiming all the deductions you are entitled to.
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