There are many misconceptions regarding a taxpayer’s ability to continue itemizing deductions under the Tax Cuts and Jobs Act of 2017 (TCJA).
Except for miscellaneous itemized deductions, taxpayers can still itemize most of their deductions. However, a substantial increase in the standard deduction will result in most taxpayers no longer needing to itemize.
Beginning this year, the standard deduction for single and married filing separately will be $12,000, up from $6,350; the standard deduction for married filing jointly will be $24,000, up from $12,700, and the standard deduction for head of household will be $18,000, up from $9,350.
While about 30 percent of taxpayers itemized before the TCJA, according to the Tax Policy Center only about 10 percent will continue to itemize under the new law.
One misconception of TCJA is that charitable contributions are no longer deductible. While there is no limit on donations made to qualified charities, that limit doesn’t matter if your itemized deductions, including charitable contributions, don’t exceed the standard deduction.
If your itemized deductions are close to or slightly above the standard deduction, you can maximize charitable deductions by bunching the donations you were planning to make over several years into one year. This process may result in itemizing deductions some years and taking the standard deduction in others.
If you haven’t decided how to distribute your charitable dollars, you can make a tax-deductible contribution to a Donor Advised Fund and select specific charities later. If you are taking required minimum distributions from an individual retirement or 401(k) account, you can save taxes by donating the distribution directly to a qualified charity.
The 2018 threshold for expenses required for a medical expenses deduction has been reduced to 7.5 percent of your adjusted gross income but returns to 10 percent in 2019. If you have substantial medical expenses and are planning to itemize in 2018, you may want to shift medical expenses into 2018 to qualify or the 7.5 percent threshold.
While you can still deduct state and local taxes, including property tax, the deduction is limited to $10,000 per year. Qualified mortgage interest remains deductible with a few limits. Previously you could deduct interest on up to $1 million in mortgage debt and up to $100,000 in home equity loans. Under the new law, your deduction is limited to interest on qualified residential loans up to $750,000. Additionally, interest on home equity loans or lines of credit is deductible only if the money is used to build or improve your home.
The TCJA eliminates all miscellaneous itemized deductions, including union dues, unreimbursed employee expenses, tax preparer fees and investment expenses. If you have significant unreimbursed employee expenses, consider seeking a different compensation arrangement with your employer. To get a tax break on your investment expenses, consider paying some of your investment fee out of your IRA.
Jane Young is a fee-only certified financial planner and can be contacted at firstname.lastname@example.org.