Take Itemized Deductions NOW
Every year, tax preparers advise their clients to pay deductible items before the end of the year in order to claim them a year earlier. This year it is especially important because it’s not just a timing difference, it is likely a matter of getting a deduction or not getting a deduction.
If you itemize deductions on your tax return, there’s a good chance this will be the last year you do it. If you have been following the GOP tax plan, you know that it almost doubles the standard deduction, while doing away with personal and dependent exemptions. Whether this is good or bad depends on how many exemptions you claim and the level of your itemized deductions.
The standard deduction for a married filing joint return will go up to $24,000 ($12,000 for single filers). Many of my clients who itemize do not have this much in deductions, which means they will go to a standard deduction. If passed, the plan won’t take effect until 2018, which means this could likely be your last chance to get deductions for CHARITABLE CONTRIBUTIONS, MORTGAGE INTEREST AND TAXES PAID.
Things to do before year-end if possible:
- Make any planned cash charitable contributions to your church or your favorite charity. If tithing, maybe you can accelerate your January contribution into December. (I have heard rumors of an “above the line” deduction for contributions but, to the best of my knowledge, it’s not in the plan.) You will need a receipt from the charity.
- Do a little housecleaning and gather clothing and household items that you no longer use to give away to the charity of your choice. This is called a “non-cash” contribution. Keep track of what you gave and get a receipt from the charity.
- Contributions will no longer be deductible if the contribution makes you eligible to buy sports tickets! (I haven’t seen this, but I have it on good authority.)
- Pay as much as possible on any home equity loans. Home equity interest will no longer be deductible. This includes any portion of your first mortgage that was not acquisition debt, ie used to purchase or improve the home. (Refinancing acquisition debt is still considered acquisition debt.)
- Pay any late property taxes, or maybe pre-pay if possible. (UPDATE: There apparently is a plan to keep people from getting a deduction for pre-paying property taxes. I don’t have any more details on this.)
- If you make estimated tax payments, make sure you pay any 4th quarter state or local payments by December 31st. (I haven’t seen the details, but supposedly you will NOT be allowed to prepay 2018 income taxes.)
- Consider making your January mortgage payment by December 31st if possible. This should give you another month of interest expense paid.
- If you have enough medical expenses to qualify for a deduction, you may want to accelerate any medical expense payments into 2017. I have heard from one source that the floor is going down to 7.5% of adjusted gross income for 2017-2018, then back up to 10% for everyone regardless of age. (The house had tried to get rid of the medical deduction, which would have been devastating for those taxpayers paying for nursing home care. The Senate plan won out, and the deduction is safe. If you are paying for long-term care, you will most likely continue to itemize your deductions.)
OTHER CHANGES FOR INDIVIDUALS:
CHILD TAX CREDITS are expanded. This is good news for families with minor children.
STUDENT LOAN INTEREST deduction is safe. It is NOT an itemized deduction. It is what’s called an “above the line deduction”, meaning you can take it even if you take the standard deduction. The house plan got rid of this deduction but, fortunately for parents and students, the final version keeps it.
STATE AND LOCAL TAXES – If you do continue to itemize, your deduction for taxes paid, including state & local income tax and property taxes, will be limited to no more than $10,000.
TAX RATES have been lowered for some individual tax brackets. Be aware that the lowering of the individual tax rates is only temporary, through 2025. Then the individual rates go back up. I have seen several analyses that say most middle-class people will get some tax savings until after 2025, when the rates expire, then they will all be paying more taxes.
ALTERNATIVE MINIMUM TAX amounts have been raised so that most taxpayers won’t have to deal with this anymore.
ESTATE TAX (DEATH TAX) exemption doubled to 22 million (joint) or 11 million (single).
HEALTH INSURANCE MANDATE is gone beginning in 2019.
CHANGES FOR SMALL BUSINESSES:
C-CORP tax rates are slashed from 35% to 21%.
S-CORPORATIONS AND PARTNERSHIPS (and possibly sole proprietorships?) – There is some sort of deduction of 20% of income on these pass-through entities. It sounds complicated so don’t get too excited yet.
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION is gone!
ENTERTAINMENT deductions may be gone! NOTE: I have heard this is in the final bill, but I have not seen it. So I am not 100% sure about this.
CASH BASIS of accounting available for most businesses with average annual gross receipts up to 25 million.
EXPANDED WRITE-OFFS for property and equipment.
NET OPERATING LOSSES no longer available to carryback, must be carried forward. Carryforward is limited.
NOTE: This is not an all-inclusive list. With the exception of the drop in the floor for medical deductions, these changes do not begin to take effect until 2018. That is why most taxpayers will be better off accelerating any itemized deductions into 2017. This advice is based on what I am reading is in the bill based on reliable sources. If you have specific questions about your personal tax situation, it is best to consult your tax advisor for specific advice.