The Tax Cuts and Jobs Act of 2017 which went into effect 2018 is probably best known for lowering the marginal federal tax rates on earned income. What is less talked about are several other changes included in this legislation that could have a significant impact on the way Americans utilize Itemized Deductions. By making multiple years of charitable contributions or planning several medical procedures in a single calendar year (stacking), some households may be able to increase their Itemized Deductions and reduce their taxes.
Significant Changes to Itemized Deductions:
- A Higher Standard Deduction – The Standard Deduction is the amount that every tax return is allowed to exclude from its earned income each year. Instead of taking the Standard Deduction, tax filers can elect to take Itemized Deductions which typically include items such as mortgage interest, state taxes, property taxes, charitable gifts, and medical expenses. The new rules almost doubled the Standard Deduction amount from $6,300 for individuals and $12,700 for joint filers to $12,000 and $24,000, respectively (2018 figures) and, in the process, removed Personal Exemptions.
- A Cap on State & Property Tax – Before 2018, state income taxes and personal property taxes were fully allowable as itemized deductions. Under the new legislation, the combined state and property tax itemized deduction may not exceed $10,000.
- Lower Mortgage Limits & Equity Loans – The loan limit on the home mortgage interest deduction was reduced for new mortgages from $1,000,000 of eligible loan balance interest and $100,000 of home equity loan balance interest down to $750,000 of the combined loan balance. Furthermore, before 2018 the home equity loan deductibility did not depend upon how the funds were used, but now the home equity loan must be used for residential upkeep or improvement.
Note: Deduction limits do not consider AMT calculations which may reduce an individual’s ability to claim certain deductions in their entirety.
What does this mean?
In 2018 it will be more difficult for taxpayers to claim Itemized Deductions. For example, if a joint filer has $7,000 of eligible state tax deductions, $11,000 of mortgage interest and $2,000 of charitable giving ($20,000 total) they would still claim the Standard Deduction as it would exceed their Itemized Deductions. In states without income tax, it will be even more challenging to qualify for Itemized Deductions.
Planning Idea – Stack Deductions
Rather than donating $2,000 per year to charity, the above family may consider giving $10,000 in one year and then not donating for five years. Using the above example, this would allow the taxpayer to qualify for Itemized Deductions in year one and then use the Standard Deduction in years two through five. This same strategy also applies to medical expenses. While medical deductibility limits apply, stacking medical procedures in a given calendar year may also allow these expenses to count toward Itemized Deductions. Rather than having one procedure in one year and another procedure in the next year, consider completing both procedures in the same calendar if they will qualify you to be able to claim an increased itemized deduction. As always, consult your tax professional for specific advice.
Andrew Hoffarth, CFP®