In part two of our four-part blog series discussing the recent income tax changes, we will be looking at the most significant changes to the standard and itemized deductions. After the changes to the overall tax rates that we discussed in the first post, the changes to the standard and itemized deductions could have the greatest impact on your 2018 federal income tax bill.
Under the new rules the standard deduction will increase from $6,350 (tax year 2017) to $12,000 for individuals and from $12,700 to $24,000 for married couples. The additional standard deduction for a blind individual or someone over age 65 will continue. In 2018, this additional deduction is $1,300 for married individuals and $1,600 for unmarried individuals. While these new standard deductions are higher, the increase in these deductions are tempered by the loss of the personal exemption of $4,050 (tax year 2017). The net result is only a slight increase in the overall deduction, from $6,365 + $4,050 = $10,400 for individuals now up to $12,000 and from $12,700 + $8,100 = $20,800 to $24,000 for a married couple.
By eliminating the need to itemize expenses, these changes to the standard deduction will simplify tax preparation and filing for significantly more tax payers. If you are reasonably sure your itemized deductions will not exceed your standard deduction, you no longer need to save and compile your previously deductible itemized expenses.
For those of us who can still utilize itemized deductions, a few minor changes were implemented. The most significant was a cap on the state and local tax deduction of $10,000. In addition, there were less impactful changes to the charitable, mortgage, and medical itemized deductions. The miscellaneous deduction that included tax prep and investment advisory fees was eliminated as an itemized deduction.
Looking at these changes from a planning perspective, the increase to the standard deduction expands the group of people who could benefit from sending charitable contributions directly to charity from a traditional IRA. If you give regularly to your church or other charity, are over age 70.5, and have money in a traditional IRA, you could potentially benefit from this strategy. We would welcome the opportunity to help you implement this strategy if you could benefit from it.
We look forward to bringing you additional highlights of the new tax reform bill in the next two blog posts. Please feel free to contact us if you have questions or would like to know how these changes might affect your specific situation.