Smart Tax Planning

About 30 million people lost these tax breaks when they filed last year

Key Points
  • During the 2018 tax year, 16.7 million households took itemized deductions on their tax returns. That’s down from 46.2 million taxpayers during the 2017 tax year.
  • The Tax Cuts and Jobs Act, which went into effect in 2018, roughly doubled the standard deduction, which led to fewer people claiming itemized deductions.
  • Popular deductions no longer available to many taxpayers include write-offs for state and local tax deductions and charitable giving.
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Millions of taxpayers missed out on a pile of tax write-offs when they filed their returns last year.

In all, 16.7 million households claimed itemized deductions on their 2018 income tax returns, according to data from the IRS. That's down from 46.2 million taxpayers during the 2017 tax year.

The decline is the result of the Tax Cuts and Jobs Act, the overhaul of the tax code that went into effect in 2018.

The change to the tax law roughly doubled the standard deduction that year to $12,000 for singles ($24,000 for married filing jointly), eliminated personal exemptions and curbed several itemized deductions.

While standard deductions reduce filers' taxable income by a flat amount, itemized deductions allow you to lower taxable income based on the sum of different expenses you incurred – including charitable giving, state and local taxes, and casualty losses.

When you file, you select whichever method reduces your taxable income the most. However, with the standard deduction so high in 2018, fewer people chose to itemize.

"The reduction in people claiming itemized deductions worked out the way it was expected; it's down from about 30% of taxpayers to 10%," said Tim Steffen, CPA and advisor education senior consultant at PIMCO.

Here are a few of the itemized deductions that taxpayers wound up not claiming.

State and local taxes

Congressmen Gottheimer and Reed on the bipartisan push to appeal SALT deducation cap
Reps. Gottheimer and Reed on the bipartisan push to appeal SALT deducation cap

The 2018 tax overhaul capped the amount of state and local taxes (known as SALT) that a household could claim to $10,000 – a move that hobbled coastal states that have high income and property taxes.

"I've seen people who are making $200,000 a year in California get hammered because of the TCJA," said Dan Herron, CPA and principal of Elemental Wealth Advisors in San Luis Obispo, California.

In the Golden State, taxpayers who itemized in 2017 claimed an average of $20,451 in SALT deductions, according to the Tax Policy Center. Meanwhile, New Yorkers who claimed itemized deductions wrote off an average of $23,804 in SALT.

Sure enough, 16 million households claimed SALT deductions in 2018, down from 44.3 million in 2017, the IRS found.

Charitable giving

SDI Productions

Just short of 14 million households took a write-off for making charitable contributions during the 2018 tax year, the IRS found. That's down from 36.8 million taxpayers in 2017.

Indeed, donations were about flat from 2017 to 2018: Americans gave away $427.71 billion to U.S. charities in 2018, an increase of 0.7% from the prior year, according to Giving USA.

"People may have accelerated some giving into 2017, knowing that the deductions were worth more," said Steffen of PIMCO.

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Further, a strategy known as "bunching" – wherein people load at least two years' worth of charitable giving into one year – has emerged to help taxpayers overcome the higher hurdle of the increased standard deduction.

"If anything, 2017 was the year to bunch, which means 2018 would be an off year," said Steffen. "That could mean 2019 is an 'on' year."

Medical deductions

Jose Luis Pelaez

Back in 2018,  about 4.3 million taxpayers wrote off medical expenses, according to the IRS. That's down from about 10 million filers in 2017.

In both years, households could write off medical and dental costs to the extent they exceeded 7.5% of adjusted gross income.

The threshold was supposed to rise to 10% of AGI in 2019, but lawmakers extended the 7.5% threshold until the end of 2020.

Casualty losses

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Finally, the tax overhaul raised the bar for deducting unreimbursed claims related to property damage from natural disasters, accidents, fires and more.

Starting in 2018, itemizers could only claim the damage if it's due to a federally declared disaster.

Sure enough, about 18,300 households took this deduction in 2018, compared to approximately 96,400 in 2017, the IRS found.