With the April 15th tax deadline coming up quickly, I’m getting questions from readers who are still trying to decide whether or not to itemize their tax deductions for 2018. Some are puzzling over the new itemization rules; some are wondering if itemizing is still worth the effort.
While many people may be worried that they have to rethink their approach to tax filing this year — and it is important to understand how the new tax rules affect you — in some ways, this year’s tax preparation may be simpler for a lot of folks. Here’s why.
The standard deduction has been increased
As you probably already know, the standard deduction was significantly increased under the Tax Cut and Jobs Act, which took effect in 2018. For single filers, the standard deduction went from $6,350 to $12,000. For married filing jointly, it increased from $12,700 to $24,000. So unless you have deductions exceeding those amounts, the standard deduction will probably work just fine for you — and simplify your filing.
Plus, if in the past your itemized deductions came in much lower than these new numbers, you’ll be getting the benefit of a higher deduction on your 2018 taxes.
Only certain expenses are still tax-deductible
If in years past you’ve struggled to keep on top of receipts for itemized expenses, you may be able to cross that chore off your list. That’s because the new tax law narrows down the number of things that are still tax-deductible. Here’s what to focus on for 2018:
• Medical expenses. If your qualified medical expenses exceed 7.5 percent of your adjusted gross income (AGI), they are tax-deductible. As an example, if your AGI is $60,000, medical expenses exceeding $4,500 would be deductible ($60,000 x 0.075). Qualified expenses include things like visits to doctors and dentists, hospital costs and transportation to medical care — even insurance premiums — for you, your spouse and your dependents. Of course, you can’t deduct expenses for which you’ve been reimbursed by insurance.
• Mortgage interest. Interest on mortgage loans is still tax-deductible if the loan was taken out to purchase or make capital improvements on your qualified primary and/or secondary residence. What has changed is the amount that’s tax-deductible, and that depends on the timing of the loan. If you took out your mortgage before Dec. 15, 2017, you can deduct interest on up to $1 million in home-secured debt ($500,000 if married filing separately). After that date, the limit is $750,000 ($375,000 if married filing separately). (Also realize that if you sell your house and purchase a new one, you’ll be covered under the new mortgage deduction limits.) Also, interest on a home equity line of credit (HELOC) is now wrapped into those totals, and is only deductible if the HELOC is used for capital improvements to your primary or secondary residence.
• Charitable contributions. If you itemize, you can still deduct charitable contributions. The challenge is to get your total deductions above the standard deduction. There are tax-smart ways to do this, such as bunching your donations, giving appreciated assets or using a donor-advised fund.
• State, local and property taxes. These are still tax-deductible but are limited to $10,000 per year for all taxes combined.
It’s a simple matter of adding it up
If you’ve always itemized in the past, it would be worth your time and effort to add up your current possible deductions to see if they’re higher or lower than the new standard deduction. This will ultimately determine whether or not you itemize. As usual, I suggest you run these numbers by your tax adviser to make sure you haven’t missed anything.•
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” You can email Carrie at firstname.lastname@example.org. The opinions expressed in this column are those of the author.
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