Congress has done its work to pass its tax plan, and now it’s time for financial planners to do theirs. This is so exciting for a guy like me to be able to help my clients figure out how to keep as much of their hard-earned money as possible.
The biggest thing to do right now is to figure out if you are likely to be itemizing your deductions in 2018. For most people the answer will be “NO.”
If your itemized deductions are less than the new 2018 standard deduction ($12,000 for single or $24,000 for married filing jointly) then you will be better off for tax year 2018 to take the standard deduction. If that’s new for you, then make sure to consider moving your deductible payments for 2018 to 2017 by making those payments before Dec. 29 (the last business day of the year).
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So, for millions of people who used to itemize, they will have a much simpler tax return come 2018 due to the tax overhaul, which Congress approved on Wednesday, Dec. 20, 2017, and sent to President Trump to sign into law.
The main items that make up your itemized deductions include:
- State & local income tax
- Property tax
- Mortgage interest
- Charitable contributions
In 2018 and beyond, your combined state & local tax and property tax itemized deduction is limited to a TOTAL of $10,000. For people who live in states with very high property taxes and a state income tax, that’s a huge blow. Probably another reason to move to a low-tax state.
How do you know if you will keep itemizing?
How to calculate your 2018 standard deduction on the back of a napkin:
Property Tax + State & Local tax (Maximum of $10,000)
+ Mortgage interest
+ Charitable contributions
= If that totals less than your standard deduction, you would simply use the standard deduction. So SIMPLE.
On the surface that looks bad for many of us, because we are losing our larger itemized deduction amount, therefore, if your income was identical you would assume you would owe more in income tax. The reason that will not be the case for many people is that the tax rates have been lowered across the board.
Before looking at the rates and brackets; the point of doing this calculation right now is that you should consider bunching your deductions in 2017 if you won’t be able to use them in 2018!
Check out this income tax calculator for an estimate of your future income tax burden:
If after doing the calculation above you figure that you will no longer be itemizing your deductions, then you may want to find a way to make these moves before Dec. 29, 2017, to get itemized deductions for the 2017 tax year:
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