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Understanding the New Tax Code: To Itemize or Not to Itemize?

By Robert J. Hughes  |  February 15, 2018

The Marks Paneth blog series entitled “Understanding the New Tax Code” is designed specifically for high-net-worth individuals to help them prepare and file their 2017 taxes and develop their 2018 tax plan.

One of the most common questions coming out of the new federal tax reform bill is: “Should I or we continue to itemize deductions?” While most high-net-worth individuals almost always itemize their deductions to help reduce tax liability, the doubling of the standard deduction and limitations on certain itemized deductions may provide reason to revisit that assumption.

Standard Deduction Doubled

For 2018, the standard deduction amounts will nearly double as follows:

  •  For Individuals:                                   From $6,500 to $12,000
  • For Head of Households:                     From $9,550 to $18,000
  • For Married Couples filing Jointly:      From $13,000 to $24,000

If you are age 65 or over, blind or disabled, you can add on $1,300 to your standard deduction ($1,600 for unmarried taxpayers.)

Medical and Dental Expense Deduction

The medical and dental expense deduction remains in place but with a lower “floor” (i.e. the expense threshold required to deduct these types of expenses). Before the tax law change, the threshold was 10% of your adjusted gross income (AGI).

Under the new tax bill, a 7.5% floor is in place for two years beginning January 1, 2017 – which means it applies to the 2017 tax filing year.

State and Local Tax Deduction

Under the new tax law, deductions for state and local taxes will remain in place on Schedule A, but there will be a cap on the aggregate amount that can be claimed here. Beginning in 2018, if you are claiming all state and local sales, income and property taxes, they may not exceed $10,000.

This is likely to cause some pain in terms of additional tax liability for many high-net-worth residents of states such as New York, New Jersey, Connecticut, California, Massachusetts and others, as these are considered by experts to be high-tax jurisdictions.

Note that state, local and foreign property taxes and sales tax, which are deducted on Schedule C, Schedule E or Schedule F, are not capped. This means for example that rental property – even if held individually and not as a separate entity – remains deductible and not subject to the new limitations.

Home Mortgage Interest Deduction

The good news is that this deduction did not disappear – but it did get modified. As of December 15, 2017, the mortgage interest deduction limitation was lowered to $750,000 for married taxpayers filing joining and $375,000 for married taxpayers filing separately (previously $1 million and $500,000 respectively). In 2026, the cap will go back up to $1 million– no matter when the mortgage was originated.

Also for tax years 2018-2025, there will be no deduction available for interest paid on home equity indebtedness. This means the attractive tax-advantaged feature of deductible interest on home equity lines of credit and loans will disappear.

Casualty and Theft Losses

The deduction for personal casualty and left losses have been repealed for tax years 2018-2025, except for losses resulting from any federal disaster declared by the president.

Charitable Donations

Charitable donations will remain deductible under the new tax law. High-net-worth individuals should plan charitable contributions to help them exceed the new standard deduction hurdle.

One change to note is that taxpayers will no longer be able to deduct payments made to a college or athletic department in exchange for college athletic event tickets/seating at a stadium or arena starting in 2018. So those choice seats you’ve written off all these years at your alma mater or kids’ colleges will no longer be a tax-deductible expense.

Miscellaneous Deductions

Miscellaneous deductions that exceed 2% of your AGI will be eliminated for tax years 2018-2015. This includes tax preparation expenses, attorney expenses and unreimbursed employee expenses (e.g. supplies, dues, subscriptions, and job search expenses).

The eliminated expenses also include unreimbursed travel expenses and the treasured home office deduction. Note that these changes apply only to taxpayers who claim an employee-related deduction on Schedule A. Business owners who typically file a Schedule C for business-related expenses are not impacted by the change.

Itemized Deductions

The silver-lining in the tax code change cloud may be that the overall limit on itemized deductions has been suspended for the tax years 2018-2025.

Conducting some preliminary tax calculations based on the changes above will help you determine whether you want to itemize your deductions when you file your 2018 taxes or if you will simply use the standard deduction. For more information on these changes and the tax savings strategies that can be implemented in response, contact Robert Hughes, Principal-in-Charge of the High-Net-Worth Group at Marks Paneth, at (212) 503-8942 or rhughes@markspaneth.com.

Also in the “Understanding the New Tax Code” series: Changes to the Alternative Minimum Tax

  

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About Robert J. Hughes

Robert Hughes, EA, is Principal-in-Charge of the High-Net-Worth Group at Marks Paneth LLP. In this capacity, he handles state, local and federal tax filings, specializing in high-net-worth individuals, estates, trusts and private foundations. Mr. Hughes began his career with the IRS where he progressed from an entry-level position in the error correction department to a senior position as Office Auditor. He also has extensive experience working in the tax departments of several high-profile banks where... READ MORE +


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