Mary Owens: Changes coming to tax deductions in new year
December 9, 2018
The Tax Cuts and Jobs Act signed into law in December of 2017 created many changes to the rules for calculating itemized deductions.
Some the of the most notable changes were the significant increases to the standard deduction amounts.
The 2017 law allowed a $6,350 standard deduction for single persons, a $9,350 standard deduction for head of household and a $12,700 standard deduction for married couples filing jointly. Those amounts were increased to $12,000, $18,000 and $24,000 respectively for 2018. However, the deduction for personal exemptions was eliminated in its entirety for 2018.
These changes will increase the simplicity of filing the majority of tax returns in the future, but not all taxpayers will like the results, especially in states where their property taxes and/or state income taxes are high relative to other states.
Starting in 2018, the amount you may deduct for state income taxes, California SDI insurance tax, real estate taxes, and personal property taxes as itemized deductions is limited to a maximum amount of $10,000. This cap amount is referred to as the SALT (State and local tax) limit. The dollar amount cap does not change based upon your filing status. If you are married or single, the cap is still limited to $10,000 annually. However, if you are married filing separately, the SALT cap is reduced to $5,000. SALT taxes that are deductible on schedule C (self-employed individuals) schedule E (rental property) and schedule F (farm income) are not limited and are still deductible in full, according to the same rules that were previously in place.
To limit the negative tax impacts of this new calculation, you need to do some careful year-end tax planning. In the past, it was common practice to pay both installments of your property tax bill by the end of the year so you could take the tax deduction in the current tax year, instead of paying the second property tax installment the next spring. It was also common practice to pay your fourth quarter estimated State income tax payments, due on Jan. 15 of each year, on or before Dec. 31. These practices frequently decreased your overall federal tax bill in the current year by increasing your allowable SALT on your itemized deductions. Under the new tax laws, this allowable method of cash flow planning may or may not be a tax benefit for you.
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If your total SALT taxes paid in 2018 already exceed $10,000, paying your state estimated taxes or both property tax installments in December will no longer lower your federal tax bill for 2018. Save your cash for now and pay those bills on the day they are due, making sure they are not late. Be careful if you are thinking of prepaying state income taxes in advance. Taxes you pay in 2018 for the tax year 2019 are going to backfire since the overpayment will be taxable to you in 2019 on your federal return if you receive a refund.
The Tax Cut and Jobs Act also eliminated miscellaneous deductions that exceed 2 percent of your adjusted gross income for years 2018 through 2025. This includes deductions for unreimbursed employee business expenses, unreimbursed employee business miles, home office expenses, tax preparation fees, and more. If you are planning to exceed the itemized deductions limits this year with the help of these types of deductions, this area will be a disappointment to you if you are counting on it to reduce your taxable income. Most of these expenses will no longer be deductible.
Charitable contribution planning also has a few new twists. With the increase in standard deductions, some tax filers may find their standard deduction is higher than their itemized deductions. If you are just under the threshold of exceeding the standard deduction, consider bunching your charitable contributions for a two-year period into one year. Pay your charitable deductions in one year in January and then pay the next year's in December of the same year. This cash flow planning may increase your allowable itemized deductions enough that you are able to itemize every other year and still get a tax break for your generosity.
For those who are extremely generous, the limit of how much you may reduce your taxable income via charitable deductions increased from 50 percent to 60 percent of annual gross income. This is one area that you can still reduce your taxable income via itemized deductions significantly.
For 2018 only, if your total medical expenses exceed 7.5 percent of your adjusted gross income, the balance is deductible as an itemized deduction on your federal tax return. This is an increase from 10 percent in previous years. However, starting with tax year 2019, the threshold percentage will return to 10 percent.
Always check with your tax professional to assist you in planning your tax strategies. The new rules are both complex and very different in their applications than prior years.
Have a wonderful Christmas and Holiday Season. See you early next year with some new tips on your estate planning needs. Tax laws changed in this area as well and many trust documents may need adjustments to address the changes in estate tax laws.
Mary Owens, Principal/Branch Manager, RJFS, 426 Sutton Way, Suite 110, Grass Valley, CA 95945, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax, legal or mortgage issues, these matters should be discussed with the appropriate professional. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Mary Owens and not necessarily those of Raymond James.
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