Managing Your Itemized Deductions – Tax Reform Implications

As you may know, one of the significant changes included in the Tax Jobs and Cuts Act of 2017 was a significant change to standard deductions. Under 2017 law, the standard deduction was $6,350 for singles, and $12,700 for married couples filing jointly. Starting in 2018, the standard deduction will be $12,000 for singles, and $24,000 for married couples filing jointly, or almost double the old limits. The only taxpayers that will be itemizing starting in 2018 are those with itemized deductions over those higher limits.

At first blush, this looks like a tremendous savings. However, keep in mind that the personal exemption deduction ($4,050 per person) has been eliminated. In other words, a single person with a standard deduction used to claim $6,350, plus a $4,050 exemption, or a total of $10,400. Under the new law, that person would claim one standard deduction of $12,000.

As with any tax legislation, there will be winners and losers by the time you analyze what the impact is on your situation. The overall legislation provided widespread changes to tax rates, increases in child tax credits, and many tax provisions to benefit businesses. The key thing is what you do to react to these changes, and proactively plan to maximize them.

With the change in itemized deductions, the vast majority of taxpayers will be claiming a standard deduction starting in 2018. However, if you are anywhere close to the “bubble” of the standard deduction ($12K single, $24K married filing jointly) , you may want to use the “bunching” strategy to maximize your deductions.

In simple terms, you alternate or group your deductions into different tax years to maximize your total benefits. For example, if you are married filing jointly, and normally have $25K of itemized deductions every year, you would receive a total deduction over a two year period of $50K. However, if you are able to shift the $25K of itemized deductions from Year #1 to Year #2, you would take the standard deduction of $24K in Year #1, and an itemized deduction of $50K in year #2, for a total deduction of $74K (or $24K higher than keeping the status quo).

There are a number of ways to achieve this result. The short list of the top deductions to manage include the following:

1)      Charitable donations – manage the timing of the donations by donating early or later than normal. Alternatively, use a donor-advised fund to “pre-load” your contributions into the tax-deductible fund, and then send them out to charities from the donor-advised fund on the same schedule as you normally would send out your donations. The donor-advised fund approach has numerous benefits, but generally only makes sense if you make significant charitable donations ($5-10K+/year)

2)      Property taxes – prepay your property taxes for the following year, and then alternate to group the deductions. Not all states and municipalities are eligible for this approach, but many are. Also keep in mind there is a new $10,000 cap on total income and property taxes that can be deducted, so exceeding this limit doesn’t generate any benefits. Consult with your tax advisor, or contact us to discuss your situation, as there can be many nuances.

3)      Income taxes – if you make any estimated tax payments, consider managing the payment schedule to group the state income tax deductions. Keep in mind the $10K total cap on income and property taxes when you do this.

4)      Medical expenses – if you have substantial medical expenses that exceed the percentage of income threshold, consider if any of these expenses can be shifted from year to year.

Another strategy that has gained importance with the tax reform legislation is the ability for taxpayers that have reached age 70 ½ to make “Qualified Charitable Distributions” directly from their IRA to qualifying charities. If you would otherwise be claiming a standard deduction and not getting any itemized deduction benefit from your donation, this may be a way for you to capture a tax benefit from your donations.

Every tax situation can be different, and there may be other factors for you to consider, including your tax brackets in each respective year and your sources of business or personal income. For a complete analysis, please consult your tax advisor or contact us to make sure your plan for managing itemized deductions captures all relevant elements.

This article is intended to serve as general guidance, and should not be construed as specific tax advice for your situation. Please consult your tax advisor for any specifics on these ideas – there are many nuances and issues that have not been fully elaborated in this article.