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How to Itemize Deductions After Tax Reform.

Due to Tax Reform, many taxpayers who claimed itemized deductions for many years will no longer be able to do so. That's because the basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and many itemized deductions have been cut back (such as a $10,000 limit on state & local income and property taxes) or eliminated (i.e. miscellaneous itemized deductions (such as investment expenses) are generally no longer deductible.

Some taxpayers may be able to apply a "bunching strategy" to push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years' worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.

 Example: John and Jane normally have $8,000 mortgage interest, $10,000 of combined state income and property tax (which is a new limit imposed by Tax Reform) and $4,000 of charitable contributions totaling $22,000 in 2019. Therefore, John and Jane will claim the higher $24,000 standard deduction. If John and Jane will have a similar level of deductions for 2020, it would be best if they contributed an extra $4,000 to charity in 2019 and nothing in 2020.

Result: John and Jane have $8,000 mortgage interest, $10,000 of state tax and $8,000 of charity totaling $26,000 in 2019. John and Jane will deduct $26,000 in itemized deductions rather than claim the $24,000 standard deduction. In 2020, they will claim the $24,000 standard deduction. Over the 2 years, they would have deducted $50,000 rather than $48,000.

For tax planning assistance contact me today.

Richard Pon CPA, CFP