One of the most significant changes in the new tax law is the doubling of the Standard Deduction.
If you file as a “Single” taxpayer, you can take a standard deduction of $12,000 in 2018, which is double what you could take on your 2017 tax return. If you are “Married Filing Jointly”, you can take a $24,000 standard deduction.
But you may be able to get an even bigger deduction if you “Itemize”.
You have two options:
Take the new, higher Standard Deduction — or —
Take the grand total of your mortgage interest, real estate taxes, charitable contributions, medical costs, and other miscellaneous items, called “Itemized” Deductions.
You simply choose the option that gives you the higher deduction, and thereby lowers your taxable income the most.
Here’s the deal: you may think you already know about Itemized Deductions.
But the rules on what you can itemize — and what you can’t — have changed under Tax Reform.
You may need to adjust your old manner of thinking about Itemized Deductions, and here’s why:
Mortgage interest. The home mortgage interest deduction now only applies to mortgages up to $750,000, compared to the prior limit of $1 million. (Consider the impact on the luxury home market.)
Home equity loans. The interest on home equity loans is no longer available :(
Real estate taxes. The new tax law limits the deduction for state and local income and property taxes to a combined total of $10,000. This will significantly impact higher income individuals and higher value real estate property owners.
Charitable contributions. Tax reform has actually increased the income-based percentage limit for donations to charity to 60%. (The prior law limited donations to 50% of your income.)
Medical costs. The new law lowers the threshold for deduction of medical expenses to 7 1/2% of your adjusted gross income in 2018 (down from 10%).
Miscellaneous itemized Deductions. These have all been eliminated. You no longer will be able to deduct financial planning fees, unreimbursed employee expenses, and other miscellaneous itemized deductions
What all this means is…
If you want to make the most of the new tax law, you should review your tax and business models now, rather than waiting until year-end 2018.
Sure, there’s lots of goodies in the new tax law that you can sit back and enjoy without any effort on your part. The doubling of the standard deduction, lower tax rates, and higher child tax credits are examples of these.
But there are a lot of other new provisions that are going to take some planning if you want to fully take advantage of Tax Reform.
Many Realtors, self-employed taxpayers, and small business owners treat taxes as a once a year event… one that takes place in April.
But waiting until after the ball drops in Times Square on New Years is too late if you want to avoid overpaying the IRS.
Take a different approach this year and make the most of the new tax laws.
Consider an approach I call tax “coaching”.
Here’s what the process looks like:
- It starts with a review prior year returns (prepared by the prior tax preparer), looking for mistakes or missed opportunities
- Then I will calculate the cost of those mistakes… how much you’re currently paying in taxes that you shouldn’t have to be paying.
- I’ll take a fresh look at everything… your business structure, retirement plan, investment portfolio… and create new tax savings.
- I’ll prepare a formal comprehensive tax plan that creates new savings
- Then it’s time to implement the plan. With some of the strategies, we’ll take the lead, helping you with what to do, how to do it, when to do it.
- With other strategies, we’ll call on outside experts for help
If you’d like lower your personal income tax using proactive tax planning, click this link and schedule a free 15 minute intro phone call with me so you can determine how you can benefit.