STANDARD VS. ITEMIZED DEDUCTION CHANGES
One of the most notable changes with the Tax Cuts and Jobs Act 2018 (TCJA) is that the standard deduction has increased to $24,000 for joint filers (and $12,000 for single filers), meaning that the total amount of your itemized deductions must be greater than $24,000 to get a tax benefit.
HOWEVER, YOU MAY STILL BE ABLE TO BENEFIT FROM YOUR ITEMIZED DEDUCTIONS BY APPLYING A BUNCHING STRATEGY TO CHARITABLE CONTRIBUTIONS AND MEDICAL EXPENSES, EVEN THOUGH CERTAIN ITEMIZED DEDUCTIONS HAVE BEEN LIMITED OR ELIMINATED FOR 2018.
The tax code allows most taxpayers to either utilize the standard deduction or itemize their deductions, whichever provides the greater benefit. While some taxpayers wait until tax time to add everything up, we prefer a more proactive approach. By applying a ‘bunching strategy’, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in another year.
The charitable contribution base has increased from 50% of Adjusted Gross Income (AGI) to 60%. If you want to take advantage of itemized deductions, but do not want all the money to go to a charity in a single year, a Donor Advised Fund (DAF) is a great vehicle to consider.
The threshold to claim itemized deductions for medical expenses is temporarily reduced to 7.5% of AGI for 2018. For tax years after 2018, the threshold returns to 10% of AGI.
Miscellaneous itemized deductions are eliminated for 2018. This includes expenses such as investment advisory fees, tax preparation fees, certain legal fees, and unreimbursed business expenses
STATE AND LOCAL INCOME & PROPERTY TAXES (SALT)
The deduction for State and Local Income and Property Taxes is limited to $10,000. You may be aware that certain states created “charitable funds” whereby a taxpayer would donate to the charitable fund set up by the municipality, take a charitable deduction on the federal tax return, and receive a credit against their property or income tax bill. Be aware that the IRS has issued proposed regulations blocking states from creating a workaround. While certain states—such as California, Connecticut, New Jersey, and New York—are continuing to fight this, expect that the $10,000 SALT limitation applies for 2018 planning purposes.