Earlier this year, the IRS released a draft of the 2018 Schedule A, Itemized Deductions form. Let’s review the rules for itemizing your deductions for 2018:
For 2018, and only for 2018, medical expenses are deductible to the extent they exceed 7.5% of your Adjusted Gross income (AGI). Staring 1/1/19, the threshold reverts to 10% of AGI.
Planning Opportunity: Check out IRS Publication 502, Medical and Dental Expenses. If your allowable medical expenses will exceed 7.5% of your AGI this year, then paying your outstanding medical and dental bills prior to 12/31/18 will increase the allowable deduction. Same goes for pre-paying for medical expenses even if the services won’t be provided until next year.
Home Mortgage Interest
Big changes with the deductibility of home mortgage interest:
Interest on a total of up to $1 million of pre-12/14/17 outstanding debt on your primary residence and a second home is fully deductible.
New mortgages debt (excluding refinancing of pre-12/14/17 mortgages) taken after 12/14/17 limited to $750k for this deduction.
Interest on home equity debt used to improve the residence securing the debt is still deductible subject to the $1 million and $750k limits above.
All other home equity loans no longer qualify for the mortgage interest deduction.
Planning Opportunity: Read the IRS’ explanation of the new rules for deducting mortgage interest and home equity loan interest and consider refinancing outstanding debt accordingly, but only if the current interest rates permit. You might also consider claiming the home office deduction to write off a portion of your mortgage interest and real estate taxes that are now non-deductible under the new rules.
The new rules increased the amount of charitable donations you can make and deduct each year to 60% of your AGI, up from 50% based on the pre-1/1/18 rules.
Planning Opportunity: Consider donating appreciated securities to a charity since you don’t pay taxes on the appreciation but can still write off the full value of the securities donated. You might also consider setting up and funding a Donor Advised Fund to frontload the tax deduction on your donations while still allowing you to disburse the contributions to the charities over a number of years.
Miscellaneous Itemized Deductions
Investment management fees, tax prep fees, and unreimbursed employee business expenses are no longer deductible effective 1/1/18.
Planning Opportunity: Consider claiming these expenses if possible against your business income reported on your Schedule C, rental income on the Schedule E, page 1, or partnership income on Schedule E, page 2.
Non-business casualty losses are now only deductible if the loss occurs in a Presidentially declared disaster area. Personal casualty losses and theft losses are no longer deducible as of 1/1/18.
Tougher To Itemize in 2018
With a $24k standard deduction and state and local taxes (SALT), including real estate taxes, limited to just $10k annually, married couples without a large mortgage might find themselves struggling to itemize their deductions under the new tax rules. Unmarried individuals can also deduct $10k in SALT taxes but have a standard deduction of just $12k, so will have a much easier time to itemize just by owning a home, having significant medical expenses, or donating a few thousand dollars to charity each year.
Planning Opportunity: Married couples might save some taxes by bunching their deductions every other year.
Phase-out of the Phase-out
Here is one last bit of good news. The new tax rules eliminate the phase-out of itemized deductions starting 1/1/18. Previously, high income taxpayers saw that their itemized deductions began to be phased-out once their income exceeded $313,800 if married or $287,650 if single.