Will you itemize deductions in 2018? Part I
- Posted on: Jan 19 2018
Traditionally, about 30 percent of taxpayers have itemized deductions on Schedule A, because their total itemized deductions were more than the standard deduction based on their filing status. For 2018, the amount of standard deduction will increase from $6,500 for individuals, $9,550 for heads of households (HOH), and $13,000 for married couples filing jointly, to $12,000 for individuals, $18,000 for HOH, and $24,000 for MFJ.
The increase in the standard deduction amounts seems to simplify the deduction scheme. At the same time, many itemized deductions have been eliminated or restricted. As a result, fewer taxpayers are likely to itemize.
The following is how Schedule A will be affected for the 2018 tax year (in the order on Schedule A):
1. Medical and Dental Expenses. These expenses remain in place but with a lower floor. Under the prior law, the excess of unreimbursed medical expenses over 10 percent of AGI could be deducted. Under tax reform, the floor decreases to 7.5 percent, which means more deduction as a result. However, this provision has been made retroactive to January 1, 2017. So you will see this change on your 2017 tax returns as well.
2. Taxes you paid. This section includes state and local taxes, personal property taxes, and real estate taxes. Under tax reform, deductions for state and local sales, income and property taxes remain in place but are limited. There is a cap on the aggregate, meaning the total amount you are claiming for all may not exceed $10,000. These taxes deductible on Schedule C and E are not subject to limitations.
Taxpayers in high-tax states may see this section’s deduction reduced and itemizing may not work for them anymore. At the end of 2017, many taxpayers were planning to prepay some of the taxes for 2018 before year end. The Congress said amounts paid in 2017 for state and local income taxes imposed for the 2018 tax year will be treated as paid in 2018. There was no similar restriction for real estate taxes. Hope those who have paid their 2018 real estate taxes will get the amounts deducted in their 2017 Schedule A.
3. Home Mortgage and Equity Loan Interest. Although real estate taxes are included in the $10,000 limit for all state and local taxes, mortgage interest remains deductible with two changes.
First, for mortgage taken out after December 15, 2017, only the interest on the first $750,000 of mortgage debt is deductible. For mortgage taken out before December 15, the limit is $1,000,000. This may not affect those who live in the states where housing prices are relatively low and mortgage are below this limit. However, for locations with high residential real estate costs, this mortgage size is common. For example, California and New York. Second, there will be no deduction available for interest on home equity indebtedness.
Therefore, if you take out a mortgage of less than $750,000 after December 15, or if your mortgage is more than $750,000 but you take it out before that date, you will not lose any interest deduction. Also, if you cannot itemize, this provision will have no effect.
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