The Tax Cuts and Jobs Act is bringing major changes in 2019. For those who previously itemized their deductions, it may be time to re-evaluate for the 2018 tax year.
Joseph J. Castriano, a tax partner at PricewaterhouseCoopers, has some advice.
1. Why itemize?
Generally, you itemize if your itemized deduction would be higher than the standard deduction. “In the past, the IRS estimated roughly 26 percent of people itemized deductions,” Castriano says. “But going forward that’s going to be more like 11 percent.” The White House estimates it could be as low as 8 percent. A reason for that drop is the increase in the use of the standard deduction.
2. New standard deduction
If you’re married and filing jointly, your standard deduction for 2018 will be $24,000. If you’re single or filing as an individual, your standard deduction will be $12,000. Previously the standard deduction was $12,700 for married couples filing jointly and $6,350 for those filing as an individual.
3. New tax rates
The top bracket starts for married couples with taxable income over $600,000 and individuals with taxable income over $500,000. The rate is now 37 percent, compared to 39.6 percent previously.
4. State taxes
The itemized deduction for state taxes is now capped at $10,000, where in past years there was no limit. Castriano says residents of high tax states like California, New York and New Jersey will have a more difficult time surpassing the standard deduction because of that limitation.
5. Mortgage interest
Another deduction that has changed is mortgage interest. The new cap on mortgage debt that you can take interest deductions on is $750,000, down from $1 million. Castriano says, “This means if you took out a mortgage of above $750,000 in 2018, you won’t be getting a tax deduction for that.” This applies to mortgages taken after December 15, 2017.
6. Charitable deductions
Key items that are still deductible with really no limitation are charitable contribution deductions. Castriano explains this is where you may be able to have the most control over the timing of your deductions. If you bunch your deductions into one year instead of multiple, then you’re more likely to exceed the standard deduction.
7. Strategies for bunching, pt. 1
According to Castriano, one way to bunch your deductions is to use a donor advised fund. These funds allow you to make a charitable contribution, and then the money is designated by you to be contributed over a specific period of time.
8. Strategies for bunching, pt. 2
Another way to bunch your deductions is through a private foundation. This typically requires larger donations, but you get an upfront tax deduction for funding a private foundation.
9. Only one way to find out
“There’s really no substitute here for running the numbers,” Castriano says. He says look at your mortgage interest expense, charitable expense and state deductions. This is where charitable deductions might play the biggest role.
10. What should you do?
If your deductions put you over the standard deduction threshold after running the numbers, then itemizing may work for you. If you’re below the threshold, taking the standard deduction might make more sense.
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