In an effort to help you understand the new tax law, we have been highlighting the key parts now in effect for the 2018 tax year.
As we explained last week, the threshold to itemize has been raised as a result of the increase in the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. Plus, those over age 65 are eligible for an additional $1,250. This change will significantly lower the number of tax filers who are able to itemize since the standard deduction is now higher and new caps are in place that reduce the amount of itemized deductions you are able to claim. Here are the five biggies:
1. There is now a $10,000 cap on state/local income taxes AND real estate taxes. So, if you happen to live in an area/house where you pay a lot of real estate taxes, you could reach the cap before you even add anything paid to the state or local governments, if you are employed.
2. You are still able to deduct mortgage interest to a maximum of $750,000 of home indebtedness. This is down from a maximum of one million dollars. Second homes are still included. For existing mortgages you are grandfathered under the old law for existing mortgages. Also, deductibility for home equity loans is eliminated if not used to acquire, build, or substantially improve your primary residence.
3. Charitable contributions are now limited to 60% of your adjusted gross income, up from 50% under the old law.
4. The medical expense deduction is temporarily expanded to using 7.5% of AGI, not 10% for anyone under age 65. If you are over 65, there is no change.
5. Finally, as we have written about before, tax preparation and investment advisory fees are no longer deductible.
If you have any questions, please let us know! Next time we will address dividends and capital gains and more!
Bill Mayer CFP®