TAX REFORM: Get Those Itemized Deductions ASAP
Of all the changes in the most recent tax reform legislation, the one likely to have the widest impact on individual tax returns are those to itemized deductions. The primary vehicle for these changes is the increase in the standard deduction amounts from $6,500 (single) and $13,000 (married-joint) in 2017 to $12,000 (single) and $24,000 (married-joint) in 2018. Some experts predict this will lower the rate of taxpayers who need to itemize from 30% of all individual returns to just 6%. That is because if you are married and file a joint return with $18,000 of itemized deductions (state income taxes, mortgage interest, charitable contributions, etc.), then it will no longer be in your best interest to itemize. Instead, you can just take the standard deduction of $24,000. That doesn't necessarily mean you are any worse off, but it does mean you get no added tax benefit from giving to a charity or paying property taxes. One positive from the reform that will benefit some is the suspension of the itemized deduction limitation that was in place if income exceeded certain thresholds. While this increase in the standard deduction could be seen as a generous offer, please be reminded that the reform has also suspended all personal exemptions from yourself, spouse, and dependents which would have been $4,150 per person in 2018.
In addition, some items that are fully deductible in 2017 will either be limited or not deductible at all in 2018. For these reasons, you may be better off paying those itemized deductions in 2017 rather than waiting to 2018. Individuals are cash-basis taxpayers, so you get the deduction in the year you make a payment either by cash, check, or credit card.
Below we will discuss some common deductions impacted.
State Income Taxes are paid either by payroll withholdings reported on a W-2 or by making quarterly estimated payments. Taxpayers making quarterly payments to Louisiana must make their fourth quarter payment by January 15, 2018. As part of the bill, the deduction for all state and local income taxes paid in 2018 plus the amounts paid for property taxes will be capped at $10,000. If your combined deduction for state income and local property taxes generally exceeds that amount, then those fourth quarter income tax payments and annual property tax payments should be paid before the end of December. Be aware that, even if paid in 2017, the state taxes may not be deductible if you are subject to the Alternative Minimum Tax (AMT). Even those whose deductions do not ordinarily exceed this amount need to be aware that if you will itemize in 2017, but will not itemize in 2018 after the standard deduction is raised, then you will get no federal tax benefit if you wait until 2018 to pay. This topic is addressing state income taxes on 2017 income. Rules will supposedly be implemented to prevent you from pre-paying your 2018 state income taxes in 2017 and taking a deduction for those on your 2017 tax return.
Mortgage Interest is generally reported to you by your mortgage servicer on an annual Form 1098. The mortgage interest is based on how much you paid to the mortgage company during 2017, not how much is accrued. If you will itemize in 2017 and will not in 2018, then prepaying your January 1, 2018 mortgage payment by December 31 can increase that interest amount on your 2017 Form 1098. If this applies to you, then you might as well get the deduction in 2017 because it will be no benefit to you in 2018. Under the new law, deduction for home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying debt of up to $750,000 total. The new lower debt limit will not apply for debt incurred before December 15, 2017.
Charitable Contribution deductions have historically been allowed on 80% of the amount paid to universities in exchange for the right to purchase tickets to athletic events even though the payments are in exchange for a product. The tax bill made these amounts nondeductible for any payments after December 31, 2017. Any questions on the ability to pay these amounts early and have them applied to 2018 tickets should be directed to those university agencies. In addition, if you will itemize in 2017, but will not in 2018 because of the increased standard deduction, then you may want to make any other planned charitable contributions in 2017 as well so that you receive some tax deduction for those contributions. One positive spin to come from reform in this area is that you can now deduct up to 60% of your adjusted gross income, which is up from a 50% limitation.
Miscellaneous Itemized Deductions include amounts paid for tax preparation fees, investment advisory fees, and unreimbursed expenses of employees (including home office deductions and mileage). The deduction for these expenses is disallowed completely for any amounts paid after December 31, 2017. If you have any of these expenses you intend to make, they should be paid before the end of 2017.
Casualty Losses The deduction for personal casualty and theft loss not compensated by insurance will be repealed unless the area has been declared a federal disaster relief area.
Medical Expenses While not many are able to take advantage of this deduction, the threshold has been made more generous by lowering the threshold to 7.5% of adjusted gross income versus 10% previously.
If you have any questions or would like to request information regarding sales and other tax services provided by Faulk & Winkler, please contact our office at (225) 927-6811.