CPA-attorney Mark J. Kohler explains how 2018 tax reforms changed the itemize-versus-standard-deduction decision. The standard deduction roughly doubled, SALT deductions capped at $10,000, and miscellaneous deductions eliminated entirely. Most taxpayers will now take the standard deduction instead of itemizing.
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Hi, Mark Kohler here, CPA attorney. Now, I'd like to talk about itemizing versus a standard deduction. Now, this is a big decision because it can have a huge impact on your tax return and save you a lot of money, a lot of taxes. Now, in 2018, the rules changed, but the best way to understand the rules in 2018 is to understand what they were before in 2017. And many of you, of course, preparing your 2017 tax return. So let's break it down, what you need to know when it comes to itemizing in the standard deduction. Of course, the general plan here is you want to add up all your itemizing and see if it exceeds the standard deduction. Now, in 2017, the standard deduction was a lot less, around $6,000 single and about $12,000 married. That's been doubled for 2018. That's the standard. So you want to add up all your itemized and see if it exceeds that. And of course, you want to take the higher number. So let's go through the itemized deduction list. Now, there's five main pieces to itemizing. Number one is medical expenses. And this could be a big one for a lot of families. They spend a lot on medical. And this is your out of pocket medical copays, deductibles, prescription drugs, chiropractic, acupuncture, service dogs, service animals, you know, that sort of thing. All that added up. You want to look at that number and anything above 10% of your adjusted gross income is deductible. So it's only the amount above that number. So you do the math. You say, what's my adjusted gross income? Let's say $50,000, multiply it by 10%, that's $5,000. And then anything above that would be deductible. So if you had 6,000 in medical, you'd get to deduct $1,000. That's the first figure in your itemized deductions. Number two is mortgage interest. Now this was a phenomenal write off for many, many years. It's changed dramatically. Going to want to watch the video on mortgage interest. But in 2017, still a pretty darn good write off. Now what you're going to do is take all of your interest on up to a million dollars worth of mortgages on a qualified residence, and you get to deduct the mortgage interest on a HELOC or a second mortgage up to $100,000 worth of that mortgage, whatever the interest is on that amount. So you add that up and that's Your mortgage interest figure for, let's say, 2017. Third, charitable donations. This is a n. Want to put this in the list. You're going to add up again these five numbers. Number three being charity. And this includes up to $500 of just clothing items that you might leave at Goodwill or Salvation Army. Get a little receipt as you drive through and drop off your items and that's going to be $500 plus, you know, all those things you might make a donation for, for your church or whatever. Keep the receipts. That's your charitable figure. Number four is salt. State and local taxes. This is a big one. There was no limit in 2017. So any property taxes you paid, state income taxes, local taxes, add all that up and that's line number four. Finally, number five, miscellaneous deductions. Now this is kind of a grab bag. There's a variety of items in it like unreimbursed employee expenses, tax preparation fees, investment expenses. You're going to add up all those items and they go into this miscellaneous column. Now, you can only deduct those items over and above 2% of your AGI. So if you made $100,000, you'd take 2%, which is 2,000, and that's the floor, and then anything above that would be deductible. So if you had $3,000 of miscellaneous and you get to deduct $1,000 because that's the amount over the two. Now, in summary, you take those five items again, we're going to go through it. Medical, mortgage, interest, charitable, the state and local and the miscellaneous. You're going to add up those five items and see what the total is. If it's greater than your standard deduction, you're in the money. Take that and it's going to save you taxes when you start to calculate your taxable income. Now, quickly, I want to tell you what the rules are for 2018. You don't need to worry about this if you're preparing Your return for 17, but you might want to know this just as you go to spend money in 2018, maybe realizing you're not going to get a write off for this and be aware of those type of expenditures. Now, like I said earlier, the standard deduction has been doubled. But in 2018 also the itemized deductions have been limited. Let's go through some highlights real quick. First, medical. Pretty good thing here. The expenses for medical are now deductible above 7.5% of AGI, not 10%. So we get a little more of a window there. Charitable deductions, same not a big deal there. But salt major problems. State and local income taxes. All of those taxes are added up and limited to a $10,000 maximum number. It's going to hurt a lot of people in states where they may pay a lot in state taxes. And used to be able to deduct that as an itemized deduction. Now the mortgage interest. Major changes. Fairly complicated too. Shot a separate video on that. Watch it when it comes to mortgage interest because that's going to play into your maybe strategy for buying a home this year or doing any refinancing, but it's been limited. And then finally, the miscellaneous itemized deductions, gone entirely. No deduction there anymore. So in summary, in 2018, millions of Americans are going to be choosing the standard deduction rather than itemizing because it's been limited so much. And then a lot of Americans that still have itemized deductions, but they're limited, you're going to pay more in taxes. This is why this new tax bill has winners and losers. Be aware of this. Gather your records and input this information so you can make the best decision during tax preparation. Thanks so much for watching and if you found that helpful, please look in the description below. 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