One of the biggest changes coming out of the new Federal tax law involves the so-called “standard deduction” available to individual taxpayers. For years prior to 2018, middle and higher income taxpayers would almost always itemize deductions (such as mortgage interest, state and local taxes, charitable contributions and medical expenses) to reduce their taxable income. This was because the “standard deduction” was rather low — $6,350 for individuals and $12,700 for married couples. A married couple with more than $12,700 in itemized deductions would do better to itemize on Schedule A as against taking the standard deduction.
Under the new tax law, the standard deduction for individuals has been raised to $12,000; for married couples, the standard deduction has been raised to $24,000. Further, certain itemized deductions have been limited for 2018. One of the biggest, state and local tax deductions, (typically income and property taxes in Pennsylvania) are now capped at $10,000. This is a big change which could substantially reduce the amount of available itemized deductions, since these taxes usually far exceed $10,000 for middle and higher income homeowners.
What to do? Compute your available deductions under the new tax law, subject to the new limits. If your total itemized deductions come to less than $24,000 for joint filers ($12,000 for individuals), the standard deduction makes more sense. Even where your itemized deductions slightly exceed the standard deduction it might make sense to take the standard deduction because it requires no calculation, no record keeping, and has no future audit risk (unlike charitable contributions and other deductions which are subject to documentation and can be challenged by the IRS in an audit.) Taxpayers in high tax states will be hit hardest by the new limits on itemized deductions.
In states like California, New York and New Jersey, which have high income and property taxes, large itemized deductions for state and local taxes will be severely cut back. Even middle and upper income families might see their taxable income increase if they live in high tax states. This could be partially offset by lower tax rates under the new tax law but it is likely that upper income taxpayers in these states will end up paying more tax. One thing is certain. Many taxpayers will find themselves in unfamiliar territory as a result of the recent tax law changes. Don’t wait until April of 2019 to get together with your accountant or tax preparer. — Kevin Palmer