There has been a lot of discussion in the media in the past couple of days regarding the new tax law and how the change to the standard and itemized deductions could affect certain taxpayers. The Boston Globe had an article about how residents in Massachusetts are running down to their town offices to prepay property tax for 2018. The Washington Post ran an article describing the “5 things to do before Jan. 1 to lower your tax bill”.
These articles focus on trying to front load itemized deductions in 2017 before they are reduced, eliminated or become irrelevant to your tax situation. But should you spend your week between Christmas and New Year’s trying to decide which charity is most deserving of your year-end bonus or trying to convince your town tax collector to cash a check for the next five years of your property taxes? It depends on your unique personal tax situation.
Considerations to think about
There are a lot of considerations to make when trying to decide if making a year-end tax move is the right decision for you. Do you have the available cash to do it? Do you currently itemize your deductions or take the standard deduction? With the standard deduction increasing to $12,000 for single and $24,000 for married in 2018 will you take the standard deduction in 2018? Are you currently subject to the Alternative Minimum Tax (AMT) which disallows certain deductions? Will your municipality allow you to prepay property taxes? Do you make a lot of charitable contributions? Do you own a home with mortgage interest? Do you have a medical related purchase that you could make in 2017?
Consult a Professional
Your best course of action is to contact the person who prepares your tax return and ask them for guidance. They will have relevant knowledge of your personal tax situation and will be able to guide you in the right direction. If you do your own tax return, take a look at whether or not you think you will change from itemizing in 2017 to taking the standard deduction in 2018. If that is the case, it may make sense for you to front load your itemized deductions in 2017.
Some things to note about itemized deductions under the new tax law:
State and Local Income Taxes & Local Property Taxes: In 2018 and beyond there is a $10,000 cap on state & local income tax AND property tax combined (applies to both single and married filers). An individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the $10,000 aggregate limitation. But you can pre-pay property tax and have it counted for 2017 deduction purposes if your municipality allows it.
Mortgage Interest: Starting in 2018, mortgage debt is limited to $750,000. However, for mortgages signed before Dec. 15, 2017 the old limit applies. In 2018 there will also no longer be a deduction for interest on home equity debt that was not used to improve or purchase a property. This applies regardless of when the home equity debt was incurred.
Miscellaneous itemized deductions: There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
Medical expenses: Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
Charitable Contributions: The standard rules for charitable contributions limit the deduction for cash donations to public charities (and private operating foundations) at 50% of the taxpayer’s AGI. However, this 50% limit is expanded to 60% in 2018.
Alternative minimum tax (AMT) exemption: The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.