Ever since the Tax Cuts and Jobs Act of 2017 officially came to the fore as a law, it has brought about some very significant changes in the US tax code, thereby impacting every taxpayer in some way or the other. While there has been a reduction in certain effective tax rates, the Trump tax reform has also eliminated various credits and deductions for individual taxpayers. Hence, it is important to understand the mandates of the new tax reform if you wish to optimize your tax benefits while keeping your tax liability at a minimum.
According to the Act, personal exemptions are no longer liable for deductions. On the other hand, standard deductions stand almost doubled now. Henceforth, from 2018, the Tax Cuts and Jobs Act is all set to change itemized deductions up to 2025. Here are some significant changes that have been set in motion under this Act:
- The ceiling for annual itemized deductions for all local and state taxes is $10,000.
- The “miscellaneous itemized deduction” that were subject to the 2% floor (tax preparation fees, investment advisory/management fees, and unreimbursed employee business expenses) are now suspended.
- Medical expense deductions now stand at 7.5% of AGI (adjusted gross income), reduced from the 10% of AGI under the Affordable Care Act (ACA). Casualty losses can only be claimed if the area falls under federally declared disaster areas.
- While the deduction of interest on home equity debt stands suspended, the itemized deduction for home mortgage interest is now limited to interest paid/accrued on the acquisition debt. The maximum ceiling for acquisition debt has been reduced to $750,000( for individuals) and $375,000 (for married couples filing separately).
So, what’s the status of standard deduction under the new tax reform?
Under the new federal tax reform, the standard deduction for all the filing statuses (individual, married filing separately, and joint filing) have considerably increased. For both individual and married filing separately, the standard deduction amount now stands at $12,000 as compared to $6,350 in 2017. On the other hand, for married couples filing jointly, the standard deduction has increased to $24,000 (2018) from $12,700 (2017). Furthermore, now the standard deduction for the head of household tax filers stands at $18,000 as compared to $9,350 (2017).
Which is the better option – standard or itemized deductions?
Ever since the new federal tax reform has come to pass, it has given rise to a common misconception among taxpayers that if one is not itemizing deductions in 2018, he/she will be at a position of disadvantage. With the standard deduction limits increasing, it does not entail that one will lose the tax benefit of deductions he/she had itemized previously. Actually, it is quite on the contrary. The new tax reform allows you to itemize deductions without requiring you to display any proof of the amount you wish to deduct.
Let’s assume that in 2017 the total amount of your itemized deduction was $19,000. The new tax law empowers you to claim $24,000 on standard deduction provided you file jointly with your spouse. So, this only shows that you can reap a greater tax benefit by opting for a standard deduction that by itemizing your deduction.
Thus, when it comes to itemizing deductions as of 2018, there’s not much to worry about. The new tax reform allows you to itemize deductions on your tax returns provided that your deductible expenses equals or is less than the standard deductions ceiling. However, make sure that you calculate the difference between the two to determine which one (standard or itemized deductions) is a better option for you.
Still unsure about what course to choose for tax deductions? Talk to the tax executives at MyTaxFiler today and we’ll be more than happy to steer you in the right direction! Write to us at firstname.lastname@example.org or give us a call at 1-888-482-0279.