The Tax Cuts and Job Act made some positive changes to the tax code. The reduction in marginal rates, especially on the corporate side, is noteworthy. However, there were several changes on the individual side which were absolutely ludicrous. These are noted below:
Without any discussion, Congress eliminated the miscellaneous itemized deductions. As I have written about before, in actuality, this one is truly the only legitimate deduction and is absolutely necessary to maintain the integrity of the tax code. With the new change now removing the miscellaneous itemized deduction, this person now has to pay taxes on the full amount earned without being able to deduct expenses accumulated while earning the income they are taxed on.
Another deduction Congress removed summarily is the moving deduction. Similar to the miscellaneous itemized deduction, this is a real expense that is incurred when moving to get a new job (in order to earn the income that will be taxed.) Now with the elimination of the deduction, taxpayers are no longer allowed to write off this cost.
The casualty loss deduction was also eliminated. This enabled you to deduct a loss that was due to a sudden unexpected event — such as a fire, hurricane, or robbery. Now if your house burns down, you can no longer write it off. The exception to this change is if your loss is in a federally-declared disaster area. So if your house burns down due to faulty wiring, you get no deduction. But if it burns down in a large wildfire that was later declared a disaster, you can claim the deduction. This is very egregious because the effect on the individual — the loss of a house due to a fire — is absolutely the same. This deduction elimination is unacceptable.
Furthermore, the alimony deduction was thrown out. The alimony deduction is a mechanism that prevented an inequitable tax burden to be created when a married family unit is split into two. Now, one can no longer deduct alimony payments, a move that is mean-spirited and creates a targeted tax burden on people who suffered a family breakup.
Additionally, there were two business-related deductions that were unnecessarily changed. The first one now caps the limit on the amount of business losses one can deduct at $250K ($500K if married), whereas the prior tax law did not. Furthermore, carryover losses are now limited. It used to be that you could carryover losses from one year to the next; for instance, if you had a $1 million loss on year but a $1 million gain the next, you could use that gain to offset the prior year loss. With the tax law changes, you can now only offset up to 80%.
While eliminating these important and equitable donations, Congress left in place a number of purely political/social engineering deductions and credits. Congress left in a substantial part of the mortgage deduction, which is really nothing more than a government subsidy to the real estate industry. They left in energy credits, rehabilitation and low income housing credits, and the Alternative Minimum Tax (AMT). It’s disappointing to see Congress talk about simplicity, efficiency, and equitability, while simultaneously removing good provisions from the tax code and leaving in parts that are merely political appeasements to various groups and industries. It would be wise for Congress to reinstate these various deductions as a means to truly maintain fairness within the IRC.