After Tax Reform, Does it Pay to Itemize?

Each year, when you file your individual federal income tax return, you have a choice: Take the standard deduction or itemize your deductions. Presumably, you’ll end up choosing whichever way results in the least tax.

Big changes to itemized deductions

That choice, however, is now more complicated under the Tax Cuts and Jobs Act (TCJA). By nearly doubling the standard deduction (see the “Standard deduction” chart) and limiting itemized deductions, the act reduces or eliminates the benefits of itemizing for many people.

As you work with your CPA or accountant to prepare your 2018 tax return, he or she will review your deductible expenses carefully to determine whether you’re better off itemizing or taking the standard deduction. You also can discuss strategies for going forward to maximize your deductions.

The TCJA makes several significant changes to itemized deductions. For example, for tax years 2018 through 2026, the act suspends deductions for interest on home equity debt in certain circumstances, and expands it in others.

For 2018, home equity debt used for anything other than “acquisition indebtedness” isn’t deductible at all. The $100,000 cap applicable in prior years has been eliminated and, effectively, replaced with a limit of as much as $750,000. Determining whether the loan qualifies for the interest deduction depends on the specifics of the situation.

The TCJA also: 

  • Caps deductions for state and local taxes (SALT) at $10,000 per year,
  • Limits deductions for home mortgage interest to interest on up to $750,000 of acquisition debt (down from $1 million), for debt incurred after Dec. 15, 2017 (but there’s a lot of interplay between this and the allowable home equity debt discussed above),
  • Suspends the category of miscellaneous itemized deductions that exceed 2% of adjusted gross income (AGI) — such as unreimbursed employee expenses, investment expenses and tax preparation fees,
  • Permits deductions for unreimbursed medical expenses to the extent they exceed 7.5% of AGI (increasing to 10% in 2019),
  • Allows deductions for personal casualty losses only to the extent they’re attributable to a “federally declared disaster,” and
  • Increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of AGI.

The act also suspends the “Pease limitation,” which reduced otherwise allowable itemized deductions for certain high-income taxpayers. But it’s uncertain if the suspension will provide a tax benefit.

Turbocharging your deductions

There may be tax-planning strategies you can use to boost what you can deduct, such as “bunching” your charitable gifts. Say you’re a joint filer with $8,000 in deductible mortgage interest and $15,000 in state income and property taxes. You also have $5,000 in deductible charitable gifts and no other deductible expenses.

With the $10,000 limit on SALT deductions, your itemized deductions total $23,000, so you’re better off taking the $24,000 standard deduction. You can increase your deductions by donating $10,000 to charity every other year. This strategy allows you to take $28,000 in itemized deductions in donation years and the standard deduction in the off years.

Another potential strategy is to transfer real estate and other assets into one or more nongrantor trusts. If structured properly, each trust gets its own $10,000 SALT limit, which can be offset against its taxable income. But keep an eye on regulatory developments: The IRS doesn’t like workarounds that avoid the $10,000 limit, so it may issue regulations designed to thwart these strategies.

Track your expenses

Under the TCJA, fewer people will benefit by itemizing deductions. However, the only way to know whether it pays to itemize is to track your deductible expenses during the year — and compare that amount to the standard deduction.

Chart: Standard deduction

© 2018

Filing status 2017 standard deduction 2018 standard deduction
Single $  6,350 $12,000
Married filing jointly $12,700 $24,000
Married filing separately $  6,350 $12,000
Head of household $  9,350 $18,000
Qualifying widow(er) $12,700 $24,000