Podcast: Standard Deduction vs. Itemizing

In December of 2017, the President signed into law what is called the TAX CUTS AND JOBS ACT OF 2017. This did increase the standard deduction, but it also eliminated personal exemptions beginning in 2018.

There have been many planning ideas that we have used in the past for taking advantage of both the standard deduction and the itemized deductions in alternating years – most of these revolved around bunching of deductions.

With the new tax law and the increase in the standard deduction, some of these planning ideas have become harder to achieve.

The new tax law increases the standard deduction for a single person from $6,350 in 2017 to $12,000 for 2018, roughly doubling it. It did the same for married couples. For married couples it was $12,700 in 2017, and it has increased to $24,000 for 2018. There are additional increased standard deduction amounts for those 65 and older and for the blind.

How do I determine whether I will use the standard deduction or if I will itemize?

It all comes down to math. As mentioned earlier, the standard deduction for a married couple filing a joint return is $24,000. As long as your itemized deductions are greater than $24,000, you are going to be able to itemize.

What deductions are allowed for itemizing purposes?

Less than in 2017, but there still are a number of them.

Things you can use for itemizing purposes are:

1. Medical costs. The thing with medical costs is you kind of have a hurdle. It’s a 7.5 percent hurdle of your page one income–otherwise known as your AGI (Adjusted Gross Income). So if you look at the first page of your Form 1040 and multiply that income by 7.5 percent. You need to have more medical expenses than that in order to get any tax benefit.
2. State, local and real estate taxes. In the past you could deduct this amount without limits. However, beginning in 2018 the new tax bill actually limits all those amounts (your state withholding, your local withholding, and real estate taxes) to $10,000.
3. Mortgage interest. New limitations for 2018 which we will discuss at a future time (in-depth issue).
4. Donations. Both cash and non-cash.
5. Gambling. Losses to the extent of gambling income.

At this point I should mention, there were items allowed last year that will not be allowed in 2018 for itemized deduction purposes. One of the items is employee business expenses, such as mileage and meals. There are a number of employers that do not reimburse their employees for their employee business expenses. In the past people were able to deduct that on their returns and get some tax benefit for it. That went away for 2018. This is going to really hurt people who travel a lot for their jobs but are not reimbursed by their employer. In addition, you could deduct investment expenses, certain legal expenses and accounting fees. These all went away with the new tax bill.

All that said, the deductions I just mentioned have to be more than the standard deduction of $24,000 for a married couple filing jointly to be able to itemize.

Let’s take a closer at the numbers:

If $24,000 is the number that we need to itemize; and the maximum for state, local and real estate tax you can take is $10,000; that leaves $14,000 that you would have to have in deductible medical costs, mortgage interest, investment interest, and donations. That will be a pretty high hurdle for many people to meet.

Therefore, we will see many people taking the standard deduction this year where they may have otherwise itemized in the past.

So will bunching of deductions still work?

In some cases, yes it still will (bunching of deductions is when you try to get as many deductions into a year as possible).

Examples:

1. Paying your real estate taxes in both January and December of the same year.
2. Giving a large donation to your favorite charity in a particular year where you may itemize, and then giving less in a non-itemizing year.

So whatever you do, you are trying to get as many deductions into an itemizing year as possible, and then in a year that you don’t have a lot of deductions, you just take the standard deduction. If you take advantage of these two strategies you will pay less tax over your lifetime because you will be taking advantage of both the itemized deductions when you can and taking advantage of the standard deduction when you can’t.

Jeff Dvorachek

As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.