The stores are filled with pumpkin spice everything, everyone’s discussing football, and there’s finally a bit of a chill in the air … fall is here, and before you know it we’ll be closing out another year. Now is the time to make sure your tax-planning strategies are up to date. With the new Tax Cuts and Jobs Act (TCJA) lots of the rules have changed, so let’s make sure you’re aware of some things that could affect your 2018 return.
While some taxpayers might benefit from delaying income, making tax-advantaged investment moves, or utilizing retirement savings plans to reduce taxes, we’re going to concentrate on making the most of itemized deductions.
The IRS allows every taxpayer to deduct a set amount of income, based upon filing status, with no questions asked. This is called the Standard Deduction, and the TCJA almost doubled its value. This chart compares the previous standard deduction with the new amounts:
Filing Status Old Amount New Amount
Single; Married Filing Separately $6,350 $12,000
Married Filing Jointly; Qualifying Widower $12,700 $24,000
Head of Household $9,350 $18,000
Taxpayers must choose between taking the standard deduction or itemizing on Schedule A, which is where you deduct expenses such as medical costs, state and local taxes, gifts to charities, etc. You want to itemize if the total of your allowable deductions is more than the standard deduction. Because of the new higher standard deduction amount, most taxpayers will choose it over itemizing.
However, some taxpayers who find themselves falling just short of the standard deduction may find it advantageous to time their expenses to itemize one year and take the standard deduction the next. For example, a single taxpayer who has $11,000 in itemized deductions would normally take the standard. But if they could push $2000 of those expenses into this year, they’d have $13,000 to itemize and would still be able to take advantage of the full $12,000 standard deduction next year.
So what are some strategies to consider?
In 2018, qualified medical expenses exceeding 7.5% of the taxpayer’s Adjusted Gross Income (AGI) can be deducted, but in 2019 that threshold goes to 10% of AGI. Anyone considering elective surgery or expensive dental work may want to have it done before year-end. Buying new eyeglasses and refilling all prescriptions might help push you over the 7.5% threshold. When figuring expenses, don’t forget to include post-tax health and long-term care insurance premiums and mileage driven for health care purposes. Check out the IRS's list to make sure you’re not overlooking any potential medical deductions.
Mortgage interest remains deductible for most taxpayers, so remitting your January payment during the last week of December means you’ll have thirteen months of interest to deduct on your 2018 return. Likewise, if you plan to make charitable donations in January, giving them in December means more deductions in 2018.
Finally, while it’s too late for 2018, you may be able to time your real estate taxes to maximize deductions. Many local governments do not assess a late fee on property tax bills until several days into January. By paying 2018 taxes on January 2nd and 2019 taxes in late December, you will have two years of payments to deduct on your 2019 return but will not have incurred any penalties for doing so. Before doing this, be sure to check local policies and keep in mind that the TCJA limits the total of all state and local taxes deducted in any one year to $10,000.
Carefully planning expenses can help maximize tax deductions. Tax planning strategies can become confusing very quickly, but we’re here to help. Give us a call if you want to discuss any of the strategies presented here. We’ll enjoy a pumpkin spice latte while we discuss your taxes!
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