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 be beneficial for you. With the passage of tax reform, the standard deduction available for each filing status significantly increased. If you file as Single or as Married Filing Separately, your standard deduction went up from $6,350 in 2017 to $12,000 in 2018. If you’re filing a Married Filing Joint return with your spouse, the standard deduction increased to $24,000, up from $12,700. Head of Household filers can claim an $18,000 standard deduction on their tax returns, which previously was $9,350.
Itemizing saves tax only if your total itemized deductions exceed your standard deduction. Under the new law, the standard deduction nearly doubles, thus making itemizing less likely for a large number of taxpayers. According to the IRS, about 49 million taxpayers, or nearly 30 % of filers, itemized before the TCJA. The nonpartisan Tax Policy Center predicts that figure will decrease to 10% under the new law.
It is very important to figure out now what deductions you can still itemize in 2018 and in future tax years.
State and Local Tax Deductions
A new limit on itemized deductions for state and local taxes will hit taxpayers in high-tax states hard. Under the new legislation, the deduction for all state and local taxes combined cannot exceed $10,000. These taxes include state and local income, sales, real estate, or property 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 in high tax states, 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. For mortgages taken out after December 14, 2017, only the interest on the first $750,000 of mortgage debt is deductible. This may not be a factor where housing prices are relatively low and mortgages are below this limit. You can still deduct interest on up to $1 million on earlier mortgages and home acquisition debt related to the following scenarios:
- a written contract in place by Dec. 15, 2017, where the purchase was finalized by April 1, 2018, or
- home acquisition debt taken out before Dec. 16, 2017, and then refinanced later (as long as the new loan does not exceed the principal balance on the old loan at the time of refinancing).
Interest on secondary homes may still be deductible. Taxpayers are able to deduct mortgage interest on a secondary residence, up to the applicable threshold amount, if their primary residence debt has not yet reached that limit.
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. Interest on loans used for any other purpose, such as to pay off personal debt, is no longer deductible.
Medical expense deduction
The 2017 Tax Act modified the medical expense deduction so that, for tax years beginning after December 31, 2016 and ending before January 1, 2019, the taxpayers are entitled to deduct medical expenses to the extent that they exceed 7.5 percent of adjusted gross income. It will go up to 10% in 2019.
Examples of deductible medical expenses include physician, dental and vision care, medical procedures, 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.
Conversely, items such as contributions to HSAs and health FSAs are specifically made ineligible.
IRS Publication 502 provides a comprehensive list of items that both are and are not eligible for the medical expense deduction.
Charitable contribution deduction
Charitable contributions are one of the few deductions enhanced under the Act, which increased the AGI limitation on cash contributions to public charities and certain private foundations from 50% to 60%. Amounts that exceed the 60 percent limitation can be carried forward for five years. The 30% limitation on contributions of appreciated assets still applies.
The Act limited one specific type of charitable contribution. Under the new law change, payments or gifts in exchange for the right to purchase college athletics tickets are now non-deductible.
Charitable contributions were the third largest itemized deduction in prior years, but they may soon take the lead through the year-end tax planning tools. Why? You have complete control over how much and when you give.
Even if itemizing every year might not make sense for you, you may still accumulate charitable contributions to exceed the standard deduction in 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.
Gambling Losses & Expenses
Historically, gambling losses could only be claimed to the extent of gambling winnings. Under the new tax law, expenses incurred in gambling (for example: cost of travelling to and from a casino), not just gambling losses, are also deductible to the extent of winnings. This essentially means that costs associated with a trade or business of gambling are now included in the loss limitation.
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.
Sidebar: Lost itemized deductions
The Tax Cuts and Jobs Act 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 and licenses. Investment advisory fees are also no longer deductible under the new tax law.
Personal casualty and theft losses. The deduction for personal casualty and theft losses is repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster as declared by the President (generally, this is meant to allow some relief for victims of Hurricanes Harvey, Irma, and Maria).