The 2017 Tax Act: The act significantly changes itemized deduction planning, making it very simple for some and more daunting for others. Most know the overall rules by now. But it doesn’t hurt to be reminded.
Two biggest changes:
1. Much higher standard deduction (adjusted for inflation annually).
For 2019: $24,400 for married couples filing jointly (plus $1,300 for each spouse attaining age 65: max $27,000)), $12,200 for unmarried individuals/married filing separately (plus $1,650 if attaining age 65 ($1,300 if married filing separately: max $13,850 if single (max $13,500 if married filing separately)), and $18,350 for head of household (plus $1,650 if attaining age 65: max $20,000).
For 2020: $24,800 for married couples filing jointly (plus $1,300 for each spouse attaining age 65: max $27,400)), $12,400 for unmarried individuals/married filing separately (plus $1,650 if attaining age 65 ($1,300 if married filing separately: max $14,050 if single (max $13,700 if married filing separately)), and $18,650 for head of household (plus $1,650 if attaining age 65: max $20,300).
2. The Itemized Deduction computation now has an important and costly limitation. State and local taxes that are deductible in a year are limited to $10,000 (not adjusted for inflation) ($5,000 if married filing separately). These state and local taxes (“SALT”) are primarily property taxes, state income taxes (so could time property tax and estimated state income tax payments if total annual SALT fluctuates above and below $10,000, maybe because of buying or selling a home), and, for some states (such as Arizona), vehicle license tags tax portion.
Itemized deductions for most taxpayers (who still have benefit from itemizing) often consist primarily of: mortgage interest (but for new mortgages, limited to interest on $750,000 of principal balance of primary residence only; $375,000 if married filing separately), charitable contributions and $10,000 of state and local tax. So many have a greater standard deduction, and will no longer itemize.
Bunching of charitable contributions and large uninsured medical expenses (to the extent they would exceed 10% of adjusted gross income into one year) could yield a benefit if that would push itemized deductions over the standard deduction for a year. Changing the date of a mortgage payment at year end could move another month’s interest into a “bunching year.”
With the standard deduction at a new high (for 2019 as high as $27,000 for older married couples filing jointly (in 2020 as high as $27,400)), the itemized deduction may offer no benefit, when it had in the past. Also for many more potential or actual homeowners who now don’t itemize, there is no tax subsidy in home ownership. For many others who do, property taxes may now not be subsidized in whole or in part.
Old rules scheduled to return: But don’t completely forget the old rules. In 2026 the standard deduction rules will revert to what they were before the 2017 Tax Act. For example, among other things, the standard deduction for married couples could be around $14,500 (estimated for inflation adjustments), and itemized deductions will have no SALT limitation and will include miscellaneous itemized deductions and phase outs of deductions for higher income taxpayers nixed by the 2017 Tax Act.
For more information on this week’s Pre-Halloween Tax Tip, please contact Les Raatz at x5022 (602-285-5022) or another member of our Estate Planning or Tax Practice Group who haunt Dickinson Wright.