Do I still get to itemize?
February 20, 2018
Do I still have enough to itemize?
Since before I can remember, taxpayers have had the option of reducing their income (to arrive at taxable income) by using either the standard deduction or itemized deductions. It was the one place on the tax return where most folks felt like the IRS granted them a little bit of favor…because you got to deduct whichever one was LARGER.
Itemized deductions are made of things like medical expenses, state taxes paid, charitable contributions, unreimbursed employee expenses, and a few others. Some of these are subject to a threshold, but we won’t get too far into that for now. If you added all these things up, and it totaled out to be more than the standard deduction that the IRS lets everyone take ($6,350 Single or $12,700 Married), you got to claim it.
The Tax Cuts and Jobs Act (TCJA) made what some believe is the largest impact on middle class citizens in this area of taxation. First the TCJA has increased the standard deduction to nearly double at $12,000 for single filers and $24,000 for married filing joint filers. This is GREAT news for taxpayers that don’t have enough deductions to itemize (those who rent, have paid off their home, etc…). But what about those taxpayers who usually DO itemize.
Let’s look at an example. You might be thinking, “this really doesn’t matter, my itemized deduction are always around $30,000” and you would be thinking down the right path. HOWEVER, the itemized deductions took a big hit under the TCJA as follows:
-Your State taxes paid (income tax, real estate tax, and personal property) are now capped at $10,000. If you normally paid in more than this to state taxes, your deduction will now be reduced.
-The amount of mortgage interest you can claim now depends on how much you financed and when you took the loan out. If you took out your mortgage after December 14, 2017, you can only deduct the interest on the first $750,000 of mortgage debt. If you purchased before this date, the old rules apply (First $1 million). Another change in this arena is that Home Equity Credit interest is absolutely no longer deductible unless the loan was taken to improve the “current” home…even if the loan was taken out prior to December 15, 2017.
-Charitable contributions survived the cuts and are still deductible. In fact, they helped us here just a bit. Under former law, you could only deduct up to 50% of your adjusted gross income as charity. That limit has been raised to 60%.
-As for the other deductions; unreimbursed employee expenses, tax preparation fees, personal casualty losses, and other miscellaneous deductions are all gone and no longer deductible.
In conclusion, for taxpayers that used to itemize, they may find it no longer beneficial to do so as the cuts to itemize may have brought those deductions to a lower amount than the new Standard. On the flip side, those who used to itemize may now get a larger deduction with the standard. As an example, a married couple that used to itemize by claiming $19,000 in itemized deductions will now benefit by taking the new $24,000 standard.
Stay tuned for our next blog where we will discuss what’s going on with credits and deductions such as the Child Tax and Education credits as well as the above-the-line deductions like alimony and moving expenses.