ITEMIZED TAX DEDUCTIONS
2017 Tax Cuts & Jobs Act
What You Need to Know
The 2017 Tax Cuts & Jobs Act (TCJA) significantly impacted homeowners who typically itemized their mortgage interest, real estate taxes, out-of-pocket medical expenses, unreimbursed employee expenses and charitable donations on Schedule A of Form 1040.
To better understand these tax law changes, first look at page 2 of your 2017 Form 1040, line 40. If you find $6,350, $12,700 or $9,350 on this line, it means that you did not itemize your deductions in 2017 but received a better tax benefit by claiming the standard deduction. It also means that you do not have a Schedule A attached to your 2017 tax return. Taxpayers who itemize are typically those with a mortgage on their primary residence and who pay real estate taxes. As taxpayers age, their mortgages are generally being paid off and the monthly payment to the mortgage lender is often mostly principal, which is not tax deductible, versus interest which is tax deductible. Hence as taxpayers age, more taxpayers are more likely to claim the standard deduction rather than itemize their tax deductions.
Beginning with the 2018 tax year, the standard deduction significantly increases from $6,370 to $12,000 for single/individual taxpayers; $12,730 to $24,000 for married filing joint filers; and from $9,350 to $18,000 for Head of Household filers. Thus if itemizing did not reduce your taxes in 2017, it likely will not do so in the coming tax years. If you did itemize in 2017 because your claimed tax deductions exceeded the 2017 standard deduction but not the new 2018 standard deduction, the good news is that you no longer need to send those receipts, cancelled checks, etc. to support tax deductions claimed on Schedule A. You simply instruct your tax preparer to claim the standard tax deduction.
The above tax law change reduces the taxes paid by many taxpayers because their taxable income will decrease due to the higher standard deduction that can be applied against their gross income to arrive at their taxable income. In addition, the new tax act reduced the individual tax rates for most taxpayers allowing them to pay less in taxes.
Taxpayers who have itemized deductions in excess of the standard deduction and who will continue to use Schedule A to claim mortgage interest, real estate taxes and unreimbursed employee expenses, may find themselves paying more taxes. Let’s look at each of these items.
The TCJA tax law:
- Caps mortgage acquisition interest on $750,000 of debt (excluding current acquisition debt which has been grandfathered in). So if you purchased multiple residences for vacation purposes, the combined debt cannot exceed $750,000 for all primary and secondary residences owned by you.
- Eliminates the interest deduction for interest paid on home equity loans used for purposes other than making home improvements or acquisitions, such as for auto and student loans.
- Caps real estate taxes and state and local income taxes paid by you (the combined amounts) to $10,000 per year as an itemized deduction.
- Eliminates unreimbursed employee expenses as a tax deduction. If your employer requires you to incur expenses on behalf of the employer without reimbursing you, it may be time to approach the employer about changing the policy so that the employer reimburses you for such outlays.
- Eliminates tax preparation and investment advisory fees as itemized deductions.
Planning Alert: The ceiling on mortgage debt means you need to reconsider the use of such debt. If the interest you were paying on mortgage interest was fully deductible in prior years which reduced the economic cash outlay associated with this debt, but going forward that tax deduction is being eliminated or reduced, is the carrying of such debt good financial planning?
Planning Alert: You need to ask yourself will these tax law changes affect the fair market value of vacation homes if the mortgage interest and real estate tax deductions are reduced or eliminated.
Planning Alert: If you donate to charity and no longer itemize, the tax savings associated with making charitable contributions is lost. One strategy may be to bundle several years’ worth of deductions and make them in one year to exceed the standard deduction. For example, if you normally made $8,000 worth of donations each year and can now claim $12,000 as a standard deduction, by bunching two years of contributions ($16.000) in a single year, you would receive a tax benefit for those contributions. There is no IRS restriction in switching between itemized and standard deductions in any tax year.
Planning Alert: An alternative charitable contribution strategy is to explore the use of Donor-Advised Funds.
Planning Alert: If you are over age 70 1/2 and are receiving required minimum distributions (RMDs), you may wish to consider using a Qualified Charitable Distribution (QCD). While the requirements of a QCD are stringent, they are not onerous and allows a taxpayer to designate all (or a portion) of a RMD to a qualified charity. This allows the donor to reduce his/her taxable income (because the RMD is not considered taxable income to the extent it qualifies as a QCD) and still claim the standard deduction. Another potential benefit of the QCD is that it may reduce the amount of Social Security benefits that are deemed taxable income, resulting in additional tax savings.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.