If you continue to itemize deductions, there have been some notable changes:
- Pease limitation has been repealed, which means higher income people will not have the value of their itemized deductions reduced or phased out.
- Mortgage interest will be deductible up to $750,000 of debt. However, the interest on existing mortgages originating on or before December 15, 2017, will be deductible on debt up to $1 million. The effect of lowering the mortgage limit will likely be regional. Most mortgages are far less than $750,000. In addition, the deduction for interest paid on home equity loans, both new loans and existing, has been eliminated.
- Charitable contributions will continue to be deductible. Donations of cash to public charities is deductible up to 60% of adjusted gross income, up from a limit of 50% last year – an important shift to note for wealthy clients who are charitably-minded.
- Medical expenses will be deductible to the extent they exceed 7.5% of adjusted gross income, down from 10% previously. This change to a lower threshold is in effect for 2017 and 2018 only, therefore it may make sense to pay as much of these expenses as possible now, in order to take advantage of the change before the threshold reverts to 10% beginning with the 2019 tax year.
- State and local income taxes (SALT), as well as sales and property taxes, are still deductible, but now capped at a total of $10,000 combined. This means a widely used year-end planning strategy of prepaying income and property before December 31 will benefit fewer people.
With the standard deduction now so much higher, many taxpayers will not receive a tax benefit from charitable contributions, property taxes, mortgage payments and medical expenses. However, some people may benefit from “bunching” these deductions, essentially doubling up on certain costs one year while taking the standard deduction another year. Also, donor-advised funds will likely become more popular, where the taxpayer gets a deduction by itemizing in the year a contribution is made to the fund and then directs distributions from the fund to charities in subsequent years.