While only 1/3 of taxpayers currently itemize their deductions, those who do itemize know what a powerful force it can be to help offset taxable burden.
The recently passed tax bill comes with some significant changes related to deductions. If you take the standard deduction, you can see our previous post linked here. If you are an itemizer, there are two things you need to consider.
- How have specific itemized deductions changed with the passing of this new bill?
- Since the standard deduction has effectively doubled, and itemized deductions are changing, will I still be able to itemize?
Let’s look at the first question to see what changes are being made to common itemized deductions.
State & Local Tax Deductions – previously, state and local taxes (commonly known as the SALT deduction) allowed taxpayers to write off taxes paid to other governing bodies without a cap. Now, the SALT deduction is capped at $10,000 but you are allowed to combine various taxes paid to hit that threshold, including state, income and local.
Medical Deductions – these deductions are major component of tax offset for many Americans. Previously, if you were under the age of 65, you had to meet a medical expense threshold of 10%, and only 7.5% if you were 65 or older. Now, for the next two years at least, all taxpayers regardless of age can utilize the smaller threshold of 7.5% – allowing more people to take the deduction.
Mortgage Interest Deductions – previously, you could deduct interests on mortgages with loan amounts up to $1 million dollars; going forward the future cap on deducting interest is only on mortgages worth $750,000 or under. While this will only affect a handful of people, it is important for them to know that the tightened cap only applies to new mortgages.
2% Threshold Deductions – some of the most commonly used 2% threshold deductions were eliminated completely, including the deductions for tax preparation; some have been eliminated until 2025, including investment management fees and un-reimbursed employee expenses.
The second question, about whether or not you can or should still itemize, depends completely on your own unique situation. One thing to note is that even though there were no material changes to deducting charitable contributions, with the new higher standard deduction, they do not carry the same weight in tax planning as they used to – so if that is a cornerstone of your tax strategy, we might want to work on finding some new opportunities for future tax savings.