Standard deduction vs itemized deductions

How the new tax rules impact you

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Daniel A. Mace, CPA

One of the biggest changes to come out of the new tax law is the increase of the standard deduction. It’s now substantially larger than in the past. That, plus certain deductions you’re no longer allowed to take, means many people won’t be able to itemize anymore or it won’t be beneficial to do so for federal income tax purposes. These changes may or may not be good, depending on your individual circumstances. There is always the caveat, at least for Arizona, that you may still be itemizing to save money on your state taxes. Here’s what you need to know about how this could impact your federal tax picture.

Standard deduction

This is one area of the tax code that tax reform actually did simplify. The new law almost doubled the standard deduction:

  • Single taxpayers: increased from $6,350 to $12,000
  • Married filing jointly: increased from $12,700 to $24,000
  • Head of household: increased from $9,350 to $18,000

According to the most recent data available, around 70% of taxpayers usually take the standard deduction. This number is expected to increase even more under the new law. Of course, there is a bit of a shell game going on here as the new law did eliminate personal exemptions, but that is a bit beyond the scope of this article.

State and local taxes deduction

The limitation of the SALT deduction is one of the biggest changes that could affect whether you itemize or take the standard deduction. In the past, you could deduct all the taxes you paid to your state, property taxes and any other taxes imposed on you by a state or local jurisdiction. Under the new law, this deduction is now capped at $10,000. Any state or property tax amount that exceeds $10,000 is no longer deductible.

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This is a major blow for many taxpayers. So, is there a way around it? Well, there was, maybe. For a brief period, there was a strategy of maximizing the state tax credits that are available, effectively converting a SALT deduction into a charitable donation. Unfortunately, the Treasury proposed new rules in August that block this workaround strategy. If you made a tax credit donation before August 27, 2018, you will get the charitable deduction for 2018, but for any tax credit payments made after that date, the deduction on your federal return remains a SALT deduction and subject to the $10,000 cap.

Miscellaneous itemized deductions

The other major change is the elimination of miscellaneous itemized deductions that exceeded 2% of your adjusted gross income (AGI). This includes:

  • Employee business expenses
  • Expenses to produce income
  • Home office deduction
  • Investment advisory fees
  • Legal fees for estate planning
  • Safe deposit boxes
  • Tax preparation fees
  • Uniforms and protective clothing for work
  • Union and professional dues

The two biggest deduction losses for taxpayers from this list are the employee business expenses and investment advisory fees, as these are the miscellaneous itemized deductions that are usually the largest in terms of dollars.

Employee business expenses. If you’re a small business owner and your employees incur a lot of unreimbursed employee expenses on a regular basis, you may want to discuss your reimbursement policy with your tax advisor.

Investment advisory fees. Discuss this with your investment advisor. Since the fees are no longer deductible, it may be more beneficial for you to switch to investments that pay out expenses before they pay out dividends. That way you’re no longer paying the fees – the investments are. In addition, if you had been paying your IRA investment fees outside of your IRA, you may want to reconsider this as it is no longer providing the tax benefit that it once did.

Tax planning

As we await clarification under many parts of the new tax law, be sure to check with your Henry+Horne tax advisor so you can take advantage of smart tax planning opportunities in light of these changes.

Daniel A. Mace, CPA, Senior Manager, specializes in providing tax services to small businesses, individuals and nonprofit organizations. You can reach him at (520) 836-8201 or DanM@hhcpa.com.