Overview
Recent federal tax changes—primarily the Tax Cuts and Jobs Act (TCJA) of 2017 and various subsequent relief laws—changed how many individual taxpayers reduce taxable income. The most consequential shifts: a much larger standard deduction, limits on itemized deductions (notably the SALT cap), and new rules for pass‑through business income. These changes affect planning choices: whether to itemize, how to time deductible expenses, and how to structure small‑business income.
In this article I summarize the key rule changes, explain who is most affected, offer practical planning strategies I use with clients, and link to in‑depth FinHelp resources for next steps. (This is educational; consult a qualified tax professional about your situation.)
Sources: IRS guidance and plain‑language summaries from independent policy groups inform this overview; see the IRS website for current year amounts and official guidance (https://www.irs.gov).
Key changes that matter for individual deductions
- Larger standard deduction: TCJA substantially increased the standard deduction, reducing the number of taxpayers who itemize. Standard deduction amounts are adjusted annually for inflation; check the IRS yearly update before filing.
- SALT cap ($10,000): TCJA limited the deduction for state and local taxes (SALT) to a combined $10,000 ($5,000 if married filing separately). This cap remains a major driver of itemizing decisions for taxpayers in high‑tax states.
- Mortgage interest limits: Interest on acquisition debt is deductible subject to a lower loan limit for mortgages taken after Dec. 15, 2017 (generally $750,000 instead of the prior $1 million cap). Home equity loan interest deductibility rules changed as well—confirm current rules before claiming.
- Qualified Business Income (QBI) deduction: Section 199A created a 20% deduction for eligible pass‑through business income, benefiting many small business owners and certain freelancers, though phaseouts and wage/property tests apply.
- Temporary and targeted relief measures: COVID‑era laws (including the American Rescue Plan Act) expanded certain credits and adjusted rules for specific years—some were one‑time or temporary increases, so always confirm whether benefits apply in the current tax year.
Who is most affected?
- Taxpayers in high‑tax states (e.g., CA, NY, NJ) who previously relied on uncapped SALT deductions now face tighter limits.
- Homeowners with large mortgages who borrowed before or after the TCJA effective dates—mortgage interest treatment differs based on loan origination dates and balances.
- Middle‑income taxpayers who previously itemized for mortgage interest and SALT may now find the larger standard deduction more beneficial.
- Small business owners and certain independent contractors who may qualify for the QBI deduction.
Practical examples (how these changes play out)
Example 1 — SALT and itemizing: A taxpayer in a high‑tax state used to deduct most state income and property taxes. After TCJA, the combined SALT deduction is capped at $10,000, so that taxpayer must compare total itemizable expenses (mortgage interest, charitable gifts, medical expenses over the AGI threshold, casualty losses where allowed) with the standard deduction. For many, the larger standard deduction now wins.
Example 2 — Small business owner and QBI: A freelance designer files as a sole proprietor. Under section 199A she may be able to deduct up to 20% of qualified business income, subject to limitations based on taxable income and whether the business meets the specified service trade or business rules. This deduction effectively reduces taxable income for many pass‑through businesses.
Example 3 — Mortgage interest cap: A homeowner who originated a large mortgage after Dec. 15, 2017 may have a lower mortgage interest deduction cap (generally applied to acquisition indebtedness over $750,000). That reduction can make itemizing less valuable for some taxpayers.
Actionable strategies I recommend
- Recalculate each year: Don’t assume prior year choices remain optimal. I review clients’ projected income and deductible expenses mid‑year and again in Q4 to see if they should bunch deductions or alter withholding.
- Compare standard vs. itemized: Use a worksheet or tax software to total likely Schedule A items (mortgage interest, state and local taxes up to $10,000, charitable gifts, medical expenses above the threshold) and compare them to the standard deduction for the filing year. See FinHelp’s guide on Standard Deduction vs. Itemized Deductions for a step‑by‑step comparison.
- Bunch charitable giving: If your itemizable deductions hover near the standard deduction line, consider bunching two years of charitable contributions into one year so you itemize that year and take the standard deduction the next. See our piece on Bunching Strategies to Maximize Charitable Deductions.
- Tax‑aware timing of SALT and property payments: Where possible, accelerate or defer state and local tax payments (and property tax payments) to the year that produces the greatest tax benefit, keeping the $10,000 SALT cap in mind.
- Retirement and pre‑tax benefits: Max out traditional 401(k) or IRA contributions to reduce adjusted gross income (AGI), which can preserve eligibility for income‑based deductions and credits.
- Small business structure review: If you operate a pass‑through business, work with a tax advisor to confirm QBI eligibility and whether changing entity form or compensation strategy impacts the QBI calculation.
Common mistakes and myths
- Myth: “Itemizing always reduces taxes.” Not anymore. Because the standard deduction rose so much, fewer taxpayers benefit from itemizing.
- Mistake: Overlooking temporary relief: Several credits were enhanced temporarily (for example, certain ARPA adjustments). Don’t assume expansions are permanent—check current law.
- Mistake: Ignoring phaseouts and caps: The QBI deduction, mortgage interest rules, and SALT cap all have limits and phaseouts. Applying a deduction without confirming eligibility can trigger audits or penalties.
FAQs
- Will the SALT cap change? Legislative proposals to raise or repeal the SALT cap have been discussed, but as of the latest guidance the $10,000 limit remains. Monitor Congress and IRS updates for changes.
- How do I decide between standard deduction and itemizing? Tally expected Schedule A deductions for the tax year and compare the total to the standard deduction. If Schedule A is larger, itemize; otherwise, take the standard deduction. Use tax software or a preparer to model both options.
- Can I amend a return if I missed a deduction? Yes—most taxpayers can file Form 1040‑X to amend returns generally within three years of the original filing date or two years from the date the tax was paid (whichever is later). Consult your tax advisor before amending.
Where to get authoritative, current guidance
- IRS: official guidance, inflation‑adjusted amounts, and forms at https://www.irs.gov (search “standard deduction”, “state and local taxes”, “qualified business income” or relevant topics).
- Tax Policy Center and other independent research groups provide plain‑English summaries and analysis of legislative changes.
Related FinHelp guides
- Standard Deduction vs. Itemized Deductions — https://finhelp.io/glossary/standard-deduction-vs-itemized-deductions/
- State and Local Tax (SALT) Deduction — https://finhelp.io/glossary/state-and-local-tax-salt-deduction/
- Home Mortgage Interest Deduction — https://finhelp.io/glossary/home-mortgage-interest-deduction/
Final checklist before filing
- Confirm the current tax year’s standard deduction and AGI thresholds on IRS.gov.
- Add up potential Schedule A items and compare to the standard deduction.
- Review QBI eligibility if you have pass‑through income.
- Consider bunching timing for charitable, medical and property tax payments.
- Consult a tax professional if your situation involves multiple limits or phaseouts.
Professional disclaimer: This article is educational and not tax advice. For decisions about your specific tax situation, consult a licensed CPA, enrolled agent, or tax attorney.
Authoritative sources and further reading: IRS (https://www.irs.gov), Tax Policy Center (https://www.taxpolicycenter.org).
