Tax Strategies for Individuals – Part 1

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Considering Standard Deduction Increase

Given the increased standard deduction for 2018 will you still be eligible for itemizing your deductions? If the total of your allowable itemized deductions exceeds the standard deduction you should still keep track of your expense documentation for support in deducting those amounts on your tax return. The new standard deduction levels are as follows:

  • Heads of household: $18,000
  • Married filing jointly: $24,000
  • All other taxpayers: $12,000

Although you may have historically had itemized deductions exceeding these amounts, other changes to itemized deductions may affect whether you are above the standard deduction in a given year. The increased standard deduction is effective through Dec. 31, 2025. Below are some highlights to changes in itemized deductions:

  • The overall phase out of itemized deductions has been repealed.
  • The itemized deduction for state and local taxes is limited to a total of $10,000 ($5,000 for those using the filing status of married filing separately). For example, if you paid $15,000 in state income taxes and $6,000 in real estate taxes on your home ($21,000 in total), you would not be able to deduct the $11,000 that exceeds the deduction threshold.
  • Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). Loans in existence on December 15, 2017 are grandfathered (balance up to $1 million still allowed).
  • Interest on home equity indebtedness (such as a home equity line of credit) is no longer deductible unless the debt is really acquisition indebtedness (used for home improvement). Consider whether the indebtedness was used for business or investment purposes to determine if an interest deduction may be available in a different category.
  • Cash donations to public charities are now deductible up to 60% of adjusted gross income.
  • Donations to colleges and universities for ticket or seat rights at sporting events are no longer deductible.
  • Miscellaneous itemized deductions, such as investment management fees, tax preparation fees, unreimbursed employee business expenses and safe deposit box rental fees are no longer deductible.
  • Medical expenses are deductible by the amount the expenses exceed 7.5% of adjusted gross income for 2018 (limit changes to 10% starting in 2019).

We have observed that many taxpayers will lower their taxes by employing the “bunching” strategy. Bunching involves loading two years of charitable contributions into Year 1, in which you itemize deductions, and using the expanded standard deduction in year 2.

Let’s discuss your projected allowable itemized deductions and/or bunching for 2018!

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View part II here.

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