- As you may remember from last December, the Tax Cuts and Jobs Act of 2017 changes what you can deduct in 2018 and beyond.
- The federal standard tax deduction nearly doubled, so it's worthwhile to see if itemized deductions still make sense for you.
- Itemized deductions are all affected—we highlight a few notable changes.
Are you ready for the new tax environment?
Filing 2018 taxes will be the first time many Americans experience the full effects of the Tax Cuts and Jobs Act (TCJA) signed into law December 2017. The new law brings a number of changes to deductions, with most changes applying to individuals for tax years 2018 through 2025. Familiarize yourself with the highlights below and talk with your tax advisor about strategies to help reduce the impact on your tax bill.
Standard versus itemized deductions
The tax law nearly doubled the standard income tax deduction to $12,000 for single filers and $24,000 for married couples filing jointly in 2018. Even if you itemized deductions in the past, it might not make sense to do so now. You would benefit from itemizing only if your total itemized deductions are higher than the new standard deduction amount.
State and local tax (SALT) deduction
The itemized deduction for state and local taxes is now limited to a maximum of $10,000, which could more significantly impact residents in high-tax states. This deduction is either: your property tax plus state and local income tax—or your property tax plus sales tax. The property taxes on certain places, such as residential rental property, remain deductible for 2018.
Planning tip: If you live in a high-tax state or think you may be impacted, consult your tax advisor to understand how this change affects you.
Mortgage and home equity interest deductions
If you incurred mortgage debt Dec. 16, 2017 or later, you can deduct the interest on up to $750,000 (previously $1 million) of acquisition indebtedness. Mortgage loans closed before that date still follow the $1 million maximum.
Home equity loan interest deductions are suspended (regardless of when you incurred the debt) between 2018 and 2025, unless you use the money to substantially improve the home and the total debt does not exceed its cost.
Planning tip: Talk to your tax advisor about the interplay between the changes to itemized deductions and your home mortgage interest deduction. Given the new limits to itemized deductions and the higher standard deduction, you won’t need to deduct the mortgage interest if you take the standard deduction.
Charitable donation deductions
These deductions remain in place, with limits for cash contributions to public charities increasing to 60% of adjusted gross income (AGI) from 50% previously. You must itemize your deductions to claim charitable donations.
Planning tip: If your itemized deductions are just below the new standard deduction, consider grouping your charitable donations into larger amounts every other year rather than smaller amounts annually. If you are age 70 ½ or older, consider making a donation from your IRA using a qualified charitable distribution, which is not taxable and could satisfy some or all of your annual required minimum distribution.
It’s important to note that if you make a qualified charitable distribution from your IRA, the custodian of your account may not identify it on your 1099-R form. It is your responsibility to inform your tax preparer of the transaction in order to secure the tax benefits.
Medical and dental expense deductions
For 2018, you can claim medical and dental expenses as itemized deductions that exceed 7.5% of your AGI.
Planning tip: If you itemize deductions, consider paying for high-cost medical and dental care before Dec. 31, 2018, if the total amount exceeds 7.5% of your AGI. The AGI floor for medical and dental expenses will revert to 10% of AGI in 2019, unless Congress acts.
Given the higher standard deduction and increased child tax credit, personal exemptions worth $4,050 in 2017 for each taxpayer, his or her spouse and each dependent are eliminated for 2018 to 2025.
Child tax credit
For 2018 to 2025, the TCJA doubles the child credit to $2,000 per qualifying child under age 17 (previously $1,000). This is a significant benefit, as a tax credit reduces your tax bill dollar for dollar and may provide a refund in some cases.
Miscellaneous itemized deductions subject to the 2% AGI floor
The miscellaneous itemized deductions that are subject to the 2% AGI floor — including unreimbursed job expenses, investment expenses and tax preparation expenses — are eliminated for 2018 to 2025.
Discuss year-end planning with your advisor
Taxes can influence your financial planning decisions. Your Ameriprise financial advisor can collaborate with your tax advisor to help ensure your investment portfolio factors in your tax situation. If you are looking to work with a tax or legal professional, your advisor may be able to refer you to one.