Financial Insights

To itemize Or Not To Itemize: Preparing For 2018 Income Taxes

Income tax planning will be a simpler process for most taxpayers starting in 2018.  The Tax Cut and Jobs Act increased the Standard Deduction from $6,350 in 2017 to $12,000 in 2018 for individuals and from $12,700 to $24,000 for married filing joint taxpayers.  Combined with new limits on common itemized deductions and the elimination of most miscellaneous itemized deductions, these changes mean that fewer taxpayers are expected to itemize their deductions going forward and most will end up choosing the Standard Deduction instead.

You’ve always had the choice to either itemize or take the Standard Deduction and the rationale for deciding which is best hasn’t changed.  Add up your available itemized deductions and compare this to the Standard Deduction.  Take whichever is higher to lower your income, and your income taxes, the most.

You know the new Standard Deductions (above) and you should familiarize yourself with the new details on itemized deductions to get a sense of where you’ll end up for 2018.

Taxpayers have four itemized deductions as follows:

If the sum of the allowable deductions for the above exceeds the Standard Deduction, then you’ll continue to itemize.  If not, then you’ll take the Standard Deduction.

The Details

SALT: The most significant change is the new $10,000 deduction limit for State and Local Taxes.  This includes both state and any local income taxes as well as property taxes, which were previously unlimited and made up the majority of itemized deductions for many taxpayers.  Starting in 2018, some portion of these taxes paid may no longer deductible for Federal income tax purposes.  How big a portion depends on your income and where you live.

As has been widely reported, the new limit is expected to significantly affect taxpayers in high tax states (CA, CT, NJ, NY, etc.).  For many, you’ll need more than $14,000 of itemized deductions from the three remaining categories to outweigh the choice of taking the Standard Deduction.

Mortgage Interest:  You may get there depending on the size of your mortgage and your mortgage interest rate.  The mortgage interest deduction was preserved and there is no change for existing loans taken out before December 15, 2017.  Interest on loans take after December 15, 2017 is limited to acquisition indebtedness (debt to buy, build, or improve your home) up to a limit of $750,000.  Interest due on Home Equity Lines of Credit also remains deductible as long as the proceeds are used to buy, build or improve your home.

For some quick context on where you may stand, $14,000 of mortgage interest is the amount you should initially expect to pay annually on a $350,000 mortgage with a 4.00% interest rate.  This amount will decline over time as you pay down your mortgage.

Depending on your health and charitable giving habits, the two remaining categories may or may not come into play on a regular basis.

Medical:  Medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI) are deductible for income tax purposes.  For example, let’s assume your AGI is $100,000.  Any medical expenses you incurred above $7,500 ($100,000 * 7.5%) would be deductible and add to your pool of itemized deductions.  So if you (or you and your spouse and/or dependents combined) spend $10,000 on medical expenses and have AGI of $100,000, then you could add $2,500 to your SALT and Mortgage Interest deductions.  Keep in mind that the floor on medical expenses will increase from 7.5% of AGI to 10% of AGI beginning in 2019.

Charitable:  The only notable change to charitable contributions is an increase in the percentage limit for cash donations, from 50% to 60% of AGI, that a taxpayer can make and deduct.  If your AGI is $100,000 then you can potentially deduct up to $60,000 for any cash donations you make.

If you take the standard deduction; however, you can’t itemize your charitable contributions and so they provide no tax benefit.

Those who give to charity regularly may want to consider grouping their deductions – making several years worth of contributions in a single tax year to raise your overall level of itemized deductions for the year – as opposed to giving a smaller amount annually where your contributions (combined with your other itemized deductions) do not end up exceeding the standard deduction.  Or if you are over age 70.5, consider making a Qualified Charitable Distribution from your IRA to the charity.  Both of these strategies may be useful for taxpayers who find that their other deductions are limited and they won’t be itemizing deductions anymore.

To Itemize Or Not To Itemize…

To determine whether you will itemize in 2018, add up the sum of the above deductions (noting the limitations on each).  To the extent that your itemized deductions exceed your Standard Deduction (either $12,000 or $24,000), you will itemize in 2018.  If not, you will be taking the standard deduction in 2018.  Keep in mind all of these changes are scheduled to sunset in 2025.

If you have questions, please reach out to your tax advisor or your Wealth Advisor.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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