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Deciding whether or not to itemize your taxes can be tricky, and changes to tax law implemented by the Tax Cuts and Jobs Act, signed into law by President Trump on Dec. 22, 2017, may have you asking, “Is it even worth it?”
To help you decide whether it makes sense for you to itemize your 2018 taxes, we looked at the pros and cons of itemizing versus taking the standard deduction, break down changes to commonly itemized deductions, and help you think through your itemizing strategy for 2018.
Itemized vs. standard deductions
When filing your taxes, you usually have a choice to use standard deductions (a portion taken from your income before taxes) or to itemize (deduct various expenses, such as charitable donations and medical bills), in efforts to pay less in taxes. In 2017, the standard deduction for single households was $6350 while married couples who file jointly could claim $12,700. Fast forward to 2018 and the standard deductions have increased significantly. Single households are now set at $12,000, while married couples are at $24,000. This means you have to itemize a lot more to pass the standard deduction threshold.
How the Tax Cuts and Jobs Act will impact your decision
While some things will stay the same under this new act — this includes deductions for teachers, electric cars, adoption assistance and student loan interest — there are changes to common deductions that will make it more difficult to meet the increased threshold. Let’s break down some of the most common items you are used to itemizing and how the new bill will impact each.
Medical expenses: Last year, you could deduct medical bills that were paid out-of-pocket and exceeded 10 percent of your adjusted gross income. This year, that number has gone down to exceeding 7.5 percent.
State and local tax (SALT): You used to be able to deduct state and local property tax along with income and sales taxes. Now, you can only claim up to $10,000 in these types of taxes combined.
Miscellaneous tax deductions: In 2017, you were able to itemize many miscellaneous items, like CPA fees that were charged while preparing your taxes. This year, most miscellaneous items cannot be itemized, including tax preparation fees, certain work-related costs and investment fees.
Personal and dependent exemptions: Your ability to claim personal exemptions on your taxes has been suspended until 2025. However, you can still claim dependent exemptions. In fact, the child tax credit has doubled from last year, rising up to $2,000 per child under the age of 17.
Estate taxes: These are the taxes that come from a large estate inherited after a death (usually by a family member). In previous years, you would not have to pay estate tax for anything up to $5.49 million, but this year it has gone up to nearly $11.2 million.
Pass-through business: Those who own their own business can now deduct 20% of their business income when they file their taxes. They don’t necessarily have to reach a minimum income either, just as long as they can show they made money. And the more they make ($157,500 for individuals and $315,000 for married couples), the better the deduction.
What should consumers consider when deciding whether or not to itemize?
There’s no question that the new tax bill is going to bring some major changes to just about everyone this year. To help you prepare, let’s consider those who might be better off itemizing than others.
The wealthy may have more opportunities to itemize. These are likely the taxpayers that can itemize the most, including any large charitable donations (think: $10,000 per year or more) they made throughout the year.
Homeowners can itemize interest and taxes. As we mentioned above, you can now only deduct up to $10,000 for state and local taxes. However, those who own their own home and pay significant mortgage interest may still exceed the standard deduction limit.
Taxpayers with children have an advantage. Let’s not forget taxpayers with several children under the age of 17, who are looking at a deduction of $2,000 per child.
When it all comes down to it, Howard Wurzel CPA, CGMA, based in New York City, stated that if you can itemize, you should. While it can be a hassle, you may reap the benefits of a lower tax liability.
“If you are actually incurring the expenses, and they exceed the standard deduction, than you should always itemize,” says Wurzel. “There is always a possibility of being audited (whether you itemize or not) so as long as you’re being truthful with your expenses you won’t have any problems.”
One way to stay on top of this is by saving your receipts. This provides proof of your expenses in case the IRS needs to see them.
Other changes to keep in mind
While we outlined some major changes to to consider when decided whether or not to itemize your taxes this year, these are not the only updates to the law. Other changes include 529 college savings plans, moving expenses, corporate taxes, alimony, and alternative minimum tax. For a detailed overview of the Tax Cuts and Jobs Act and all its changes, view our guide.