During this time of year, we prepare to close out one year and start another with holiday festivities, family, friends, and much joy. However, the start of a new year is not only a reminder to get a new calendar, but it is also a time to begin thinking about filing your taxes.
This coming tax filing season will bring a unique set of challenges. The Tax Cuts and Jobs Act was enacted at the end of 2017, and 2018 represents the first full year under the new tax code. Accordingly, many taxpayers may be surprised to find out that certain provisions in the tax code will bring significant changes to the upcoming tax filing season. Are you ready?
New Provisions for the Itemized Deductions
Many taxpayers may find that under the new tax code, it is no longer advantageous to itemize deductions. The previous and current tax codes allow individual taxpayers to choose whether they would like to use the standard deduction or itemize their deductions. These deductions are used to offset income in calculating a taxpayer’s final taxable income. In the past, many taxpayers have chosen to itemize their deductions due to items such as home mortgage interest, real estate and property taxes, and unreimbursed employee business expenses. However, it may not be useful to do so for 2018.
Under the new tax code, the standard deduction for many of the filing statuses increased significantly. For example, the Internal Revenue Service reports that the standard deduction for single taxpayers increased from $6,350 in 2017 to $12,000 in 2018, while the standard deduction for married filing joint taxpayers increased from $12,700 in 2017 to $24,000 in 2018. This means that unless your itemized deductions exceed the new increased standard deduction amounts, you will receive no advantage from itemizing your deductions, and thus, may not want to take the time to gather the documentation for these itemized expenses. This may be an opportunity for you to sit down with your tax preparer to discuss your situation to determine if it may be appropriate for you to itemize.
Many taxpayers are aware that medical expenses can be deducted for tax purposes, but are not aware of just how few taxpayers actually benefit from this deduction. For 2018, the IRS requires that expenses be over 7.5% of your adjusted gross income in order to be counted towards your itemized deductions.
The average taxpayer with an employer-provided health insurance plan will not incur enough medical expenses to qualify for deduction. Medical expenses are typically not deductible unless you have a very low level of income, or you or one of your dependents are living in a nursing home or long-term care facility, or have a large amount of medical expenses due to a chronic illness.
The new 2018 tax rules will also limit the deductibility of state and local taxes. The IRS reports that taxpayers may deduct no more than $10,000 of state and local taxes, including property, income, and sales taxes, if you are a married filing joint taxpayer. Disallowing any deduction over $10,000 will also limit a taxpayer’s ability to itemize.
Another hit for many taxpayers that typically itemize may be the loss of certain miscellaneous itemized deductions. Under the previous tax code, taxpayers were allowed to include an itemized deduction for the cost of miscellaneous itemized deductions that exceeded 2% of the taxpayer’s adjusted gross income. These miscellaneous deductions included tax preparation services, as well as certain employment-related expenses that are not reimbursed by an employer, such as uniforms, dues, tools, subscriptions, and supplies. Unfortunately, the IRS reports that these deductions were completely eliminated for 2018.
While it is important to note the impact that the increase in the standard deduction will have on many taxpayers, it is also important to understand that the increase in the standard deduction is offset by the loss of personal exemptions. In 2017, taxpayers were allowed to deduct $4,050 for the taxpayer, spouse, and any dependents claimed on the tax return. However, these exemptions were eliminated for 2018.
Consistent with previous years, the IRS will be allowing an additional deduction for taxpayers who are blind or over 65 years of age on the last day of the tax year. The IRS reports that the additional deduction amounts for 2018 for those who are either over 65 years old or blind are $1,600 for unmarried taxpayers and $1,300 for married taxpayers. Taxpayers who are both 65 years old and blind will receive a deduction of $3,200 for unmarried taxpayers and $2,600 for married taxpayers.
Talk to your Tax Preparer
The upcoming tax filing season will bring about a significant amount of change. It is important to be aware of how these changes will impact you, your tax liability, and your process for gathering the documentation for the preparation of your taxes. This is a great time to sit down with your tax preparer to discuss these changes and determine if there are any tax planning strategies you may be able to implement to reduce your tax burden. Don’t be taken by surprise by the new tax code.
Disclaimer: This column is for informational purposes and should not be considered personalized tax advice. Everyone’s circumstances are different, and individuals should seek tax advice from a tax professional based on their unique financial situation.