Let me first remind you that most deductions are taken on Schedule A as itemized deductions. One of the biggest changes from 2017 is a significant increase in the Standard Deduction. In 2017, the Standard Deduction for a single taxpayer was $6,350 – in 2018 it’s $12,000. Married taxpayers had a Standard Deduction of $12,700 in 2017 – in 2018 it’s $24,000. So many taxpayers that had previously itemized now will take the Standard. Please keep in mind – just because it’s deductible doesn’t mean that you’ll have enough deductions to benefit – you may be better off taking the Standard amount.
If you itemize, one deduction is state and local taxes. This is both state income tax paid along with local real property and vehicle taxes. There is a change for 2018 and beyond that will affect many taxpayers. In prior years, you were able to deduct the total amount of state and local taxes paid without limitation. Now, the deductible amount is capped at $10,000. This cap won’t affect many taxpayers but for some higher income folks, the limitation could significantly reduce your deduction.
As a reminder, state income tax could be a relatively small amount for some. Several years ago, the law changed to allow a deduction for state sales tax or state income tax, whichever is larger. This law has not changed. You don’t have to keep receipts for actual sales tax paid. The IRS provides a calculator to determine how much you can deduct based on your income and county of residence. If you can prove you paid more, you can deduct it. And if you paid sales tax on a large purchase like a car or a boat, you can add that tax to the calculated amount.
Another often overlooked itemized deduction is out-of-pocket charitable contributions. For example, if you volunteer to work for a non-profit and you have to provide supplies to do your job, you can deduct the cost of your supplies. Keep your receipts because you have to get an acknowledgement from the charity if your costs exceed $250. You can also deduct mileage you drive on behalf of a charity at a rate of 14 cents per mile plus any parking or tolls you pay.
One more thing on state income taxes paid…don’t forget to add the tax you paid last spring when you filed your 2017 tax return if you owed on your state return. That tax was paid in 2018 so it’s an itemized deduction on your 2018 return.
We’ve talked about taxes and contributions; mortgage interest is the other significant itemized deduction most folks claim. One overlooked deduction in this area is refinancing points paid. If you refinance, you probably paid points on the new loan. These points are deductible, but the deduction is limited. You have to deduct the amount paid over the life of the loan. So, if you paid $1,500 in points when you refinanced and your loan is for 15 years, you deduct $100 per year ($1,500 divided by 15 years) until you’ve deducted the full $1,500. Yes, it’s a small deduction but every little bit helps.
This is just a few of the changes imposed by the new tax law. And as I said earlier, many of you will take the Standard Deduction this year so these changes won’t matter to you. But if you do itemize, be sure you get every deduction you’re entitled to.
At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.