The following examples illustrate these points.
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2017, a taxpayer takes out a mortgage to purchase a main home with a fair market value of $1.2 million. The loan is secured by the main home. In January 2018, the taxpayer takes out a $100,000 home equity loan when the balance of the first mortgage was $900,000. The taxpayer may deduct all of the interest from the first loan because the first loan was originated on or before Dec. 15, 2017. The taxpayer can deduct none of the interest on the home equity loan because the $750,000 limitation applicable to the home equity loan must be reduced (but not below zero) by the amount of the indebtedness incurred on or before December 15, 2017.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 4: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.
Special rules apply to maintain these limits if you refinance your debt. For more information, see the 2018 Publication 936, Home Mortgage Interest Deduction
Limit for charitable contributions modified.
The limit on charitable contributions of cash has increased from 50 percent to 60 percent of your adjusted gross income.
THIS MEANS THAT…if you do itemize …you may be able to deduct more of your charitable cash contributions this year.
For more information, see the 2018 Publication 526, Charitable Contributions.
Deduction for casualty and theft losses modified.
Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster. See the 2018 Instructions for Form 4684, Casualty and Theft Losses, for more information about 2018 disasters.
The loss must still exceed $100 per casualty and the net total loss must exceed 10 percent of your AGI. In addition, you can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss.
THIS MEANS THAT…if you do itemize…your personal casualty and theft losses must be attributed to a federally declared disaster.
See IRS Publication 976, Disaster Relief, for information about personal casualty losses resulting from federally declared disasters that occurred in 2016, as well as certain 2017 disasters, including Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires, that may be claimed as a qualified disaster loss.
Miscellaneous itemized deductions suspended.
The previous deduction for job-related expenses or other miscellaneous itemized deductions that exceeded 2 percent of your adjusted gross income is suspended. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel, as well as any deductions you may have previously been able to claim for tax preparation fees and investment expenses, including investment management fees, safe deposit box fees and investment expenses from pass-through entities. The business standard mileage rate listed in Notice 2018-03 cannot be used to claim an itemized deduction for unreimbursed employee travel expenses during the suspension.
THIS MEANS THAT…if you do itemize…if your miscellaneous itemized deductions previously needed to exceed 2% of your adjusted gross income, they are no longer deductible.
For more information, see the 2018 Instructions for Schedule A, Itemized Deductions.
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2017, a taxpayer takes out a mortgage to purchase a main home with a fair market value of $1.2 million. The loan is secured by the main home. In January 2018, the taxpayer takes out a $100,000 home equity loan when the balance of the first mortgage was $900,000. The taxpayer may deduct all of the interest from the first loan because the first loan was originated on or before Dec. 15, 2017. The taxpayer can deduct none of the interest on the home equity loan because the $750,000 limitation applicable to the home equity loan must be reduced (but not below zero) by the amount of the indebtedness incurred on or before December 15, 2017.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 4: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.
Special rules apply to maintain these limits if you refinance your debt. For more information, see the 2018 Publication 936, Home Mortgage Interest Deduction
Limit for charitable contributions modified.
The limit on charitable contributions of cash has increased from 50 percent to 60 percent of your adjusted gross income.
THIS MEANS THAT…if you do itemize …you may be able to deduct more of your charitable cash contributions this year.
For more information, see the 2018 Publication 526, Charitable Contributions.
Deduction for casualty and theft losses modified.
Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster. See the 2018 Instructions for Form 4684, Casualty and Theft Losses, for more information about 2018 disasters.
The loss must still exceed $100 per casualty and the net total loss must exceed 10 percent of your AGI. In addition, you can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss.
THIS MEANS THAT…if you do itemize…your personal casualty and theft losses must be attributed to a federally declared disaster.
See IRS Publication 976, Disaster Relief, for information about personal casualty losses resulting from federally declared disasters that occurred in 2016, as well as certain 2017 disasters, including Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, and the California wildfires, that may be claimed as a qualified disaster loss.
Miscellaneous itemized deductions suspended.
The previous deduction for job-related expenses or other miscellaneous itemized deductions that exceeded 2 percent of your adjusted gross income is suspended. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel, as well as any deductions you may have previously been able to claim for tax preparation fees and investment expenses, including investment management fees, safe deposit box fees and investment expenses from pass-through entities. The business standard mileage rate listed in Notice 2018-03 cannot be used to claim an itemized deduction for unreimbursed employee travel expenses during the suspension.
THIS MEANS THAT…if you do itemize…if your miscellaneous itemized deductions previously needed to exceed 2% of your adjusted gross income, they are no longer deductible.
For more information, see the 2018 Instructions for Schedule A, Itemized Deductions.