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The sweeping Tax Cuts and Jobs Act (TCJA) makes many significant changes that will impact your year-end tax planning strategies. One of the biggest areas affected is planning for deductions.
Itemizing: Will you or won’t you?
When determining your year-end strategies, you first need to figure out whether itemizing will still make sense. The TCJA roughly doubles the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly.
Itemizing saves tax only if your total itemized deductions exceed your standard deduction. Because of the higher standard deduction, you might no longer benefit from itemizing. According to the IRS, about 30% of taxpayers itemized before the TCJA. The nonpartisan Tax Policy Center predicts that figure will fall to 10% under the new law.
You also need to consider how much the total amount of your itemized deductions might shrink because of the TCJA’s new limits on some itemized deductions and suspension of others. (See “Lost itemized deductions.”)
So roughly estimate your potential itemized deductions for the year. If they’re close to or above your standard deduction, take a closer look at your potential deductions so you can implement year-end strategies to reduce your 2018 taxes.
A new limit on itemized deductions for state and local taxes will hit taxpayers in high-tax states hard. Under the TCJA, a taxpayer can deduct no more than $10,000 for the aggregate of state and local property taxes and income or sales taxes. The limit applies to all filing statuses except married filing separately, which has a $5,000 limit. This restriction alone could be enough that some taxpayers, especially married ones, will no longer benefit from itemizing.
For other taxpayers, it could simply mean that the federal tax savings from their state and local tax bills will be significantly reduced. It also means that the traditional year-end tax planning strategy of prepaying a property tax bill for the current year that’s due the next year might no longer make sense. If your previous installments for the current year plus your state and local income tax liability already total $10,000 or more, you’ll get no tax benefit from a prepayment.
Home-related interest deductions
A couple of other home-related itemized deductions also have changed under the TCJA. The deduction for mortgage interest has been limited to the interest on up to $750,000 of mortgage debt taken out after December 15, 2017. You can deduct interest on up to $1 million on earlier mortgages. Prepaying your mortgage may still be beneficial if it will push you over the standard deduction and allow you to claim other deductions available only to itemizers.
The TCJA also changes the deduction for interest on home equity debt. Taxpayers can now claim this deduction only if the debt is used to acquire, build or improve the home, regardless of when the debt was incurred. In other words, you’re no longer allowed to deduct interest on home equity debt up to $100,000 used for any purpose. Thus, you no longer gain a tax advantage by taking out a home equity loan to pay off debts whose interest isn’t deductible, such as credit cards or car loans, because the home equity loan won’t provide a deduction, either.
Medical expense deduction
Thinking about elective surgery? Or need some major dental work? If you’ll be itemizing, you might want to get it done before the end of the year. The threshold for deducting unreimbursed medical expenses is scheduled to go up from 7.5% of adjusted gross income (AGI) for 2018 to 10% in 2019.
Examples of deductible medical expenses include physician, dentist and other medical practitioner fees, equipment, supplies, and prescription drugs. You also can deduct mileage driven for health-related purposes (18 cents per mile for 2018). Certain health insurance and long-term care insurance premiums are deductible, too.
Charitable contribution deduction
For charitably inclined taxpayers who itemize, charitable contributions will continue to be one of the best year-end tax planning tools available. Why? You have complete control over how much and when you give.
But even if it looks like itemizing every year might not make sense for you, with some smart planning you potentially can satisfy your philanthropic urges and reap a tax benefit. For example, you may be able to “bunch” your donations to accumulate enough charitable itemized deductions to exceed the standard deduction some years.
For example, if it’s looking like you won’t have enough itemized deductions to benefit from itemizing in 2018, you can hold off on donations you’d normally make in December and make them in January of 2019 instead. Then make your normal donations in December of 2019. By bunching two years of donations into one year, you might have enough itemized deductions in 2019 to exceed the standard deduction and enjoy some tax savings from your donations.
Beyond the deductions
The questions of whether to take the standard deduction and how to maximize your deductions if you itemize are just two of several tax issues you might need to reassess in light of the TCJA. Your tax advisor can help you find the best ways to minimize your tax liability for 2018 and into the future.
Lost itemized deductions
The Tax Cuts and Jobs Act (TCJA) suspends some itemized deductions, so they shouldn’t be factored into your 2018 year-end tax planning:
Miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor. This includes deductions for unreimbursed employee expenses, tax preparation expenses, job search expenses, dues and subscriptions, licenses, and, unless you’re self-employed, home offices.
Personal casualty and theft losses. There’s an exception for personal casualty losses due to federally declared disasters.