As part of the new tax rules that took effect 1/1/18, the standard deduction jumped to $12k for single individuals and $24k for married couples.  Additionally, the combined deduction for state and local income taxes and real estate taxes is now capped at $10k.

Other allowable itemized deductions are now limited to medical expenses in excess of 10% (7.5% in 2018) of your income, charitable donations, and mortgage interest on up to $1 million of existing debt or $750k of post-enactment debt. Taxpayers can no longer deduct miscellaneous itemized deductions which include investment fees, employee business expenses, or tax prep fees not deducted elsewhere on your return.

Thanks to a standard deduction of $12k, single individuals who earn a good salary and own a home should most likely continue to itemize their deductions.  What will happen to married couples who usually itemize?

With a standard deduction of $24k and a maximum deduction for state, local and real estate taxes of just $10k, married couples would need to have more than $14k combined of deductible medical expenses, allowable mortgage interest and charitable donations in order to itemize.  This new dynamic gives many married couples an incentive to bunch their deductions as follows:

  • If your total state, local and real estate taxes won’t exceed $10k per year, then time the payment of these taxes to hit $10k every other year.
  • Plan your mortgage payments to make 13 payments during the calendar year every other year by timing when the January payment is made.
  • Group your charitable donations together every few years.
  • Group your medical expenses too in years that they will exceed 10% of your income (7.5% in 2018), especially if you plan to itemize.

By bunching allowable deductions in an effort to minimize federal income taxes, married couples might find that they end up alternating between itemizing one year and claiming the standard deduction the next until these new tax rules sunset after 2025.