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Tax Planning For 2018 And Beyond: Bunching Deductions

Will I Itemize Deductions in 2018?

The Tax Cut and Jobs Act included a substantial increase in the Standard Deduction that each taxpayer is able to take. For individuals it moved from $6,350 in 2017 to $12,000. For married filing joint taxpayers, it went from $12,700 in 2017 to $24,000.  This change, combined with the elimination of many miscellaneous itemized deductions, means that fewer taxpayers will now itemize their deductions.  Initial estimates are that only 5% of taxpayers may itemize in 2018. That compares to 30% prior to the passage of the Tax Cut and Jobs Act.

So how do you figure out if you will itemize in 2018?  Taxpayers have been left with four itemized deductions which are as follows.

  • Medical Deductions
  • Mortgage Interest
  • Charitable Contributions
  • State And Local Taxes (SALT)

The details

Before we figure out if you will itemize, let’s explore some of the details on each of these deductions.

Medical expenses are deductible in 2018 only for those expenses that exceed 7.5% of your Adjusted Gross Income (AGI).  For instance, let’s assume your AGI is $50,000.  In this case only expenses that exceed $3,750 ($50,000 * 7.5%) would be deductible.  This provision is actually retroactive and also applies to 2017. However, beginning in 2019, the floor is raised back to 10% of AGI.

The deduction for mortgage interest still exists and existing loans taken out before December 15, 2017 are grandfathered in.  Loans after December 15, 2017 are limited to acquisition indebtedness (debt to buy, build, or improve your home) up to a limit of $750,000.  Initially the thought was that Home Equity Lines of Credit would no longer be deductible but the IRS recently issued guidance that as long as the line is used to buy, build or improve your home it remains deductible.

No major changes were made to charitable contributions aside from an increase in the percentage limit for cash donations that a taxpayer can make and deduct from 50% of Adjusted Gross Income to 60% of Adjusted Gross Income.  However, those who give to charity may want to consider bunching their deductions or if you are over age 70.5, making a Qualified Charitable distribution to the charity.  Both of these strategies are important for taxpayers who may no longer be itemizing deductions.

Finally, the biggest change comes to the deduction for State and Local Taxes (SALT).  The deduction remains in place but is now limited to $10,000.  For many taxpayers in New York and New Jersey their state taxes far exceed the $10,000 cap. this means that a portion of those taxes paid are not deductible on the Federal level.

How to determine if you should itemize

To determine whether you will itemize in 2018, add up the sum of these deductions (noting the limitations on each). If you are a single tax payer and your deductions exceed $12,000 you will itemize in 2018, and likewise, if you are married filing joint and your deductions exceed $24,000.  If not, you will be taking the standard deduction in 2018.  Keep in mind all of these changes are scheduled to sunset in 2025.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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