How the New Tax Law Changed My Approach to Deductions
- The Tax Cuts and Jobs act was passed in 2017 and made some dramatic changes to the taxes of nearly every American tax filer.
- Though most of the benefits of the tax law focus on businesses, individuals and families will see changes to their taxes as well, one of the biggest being standard deduction versus itemized deductions. The standard deduction roughly doubled from 2017 to 2018, which has an outsized impact on those in high SALT (state and local taxes) states.
- Creator of Personal Profitability, Eric Rosenberg, shares how his approach to deductions shifted after the act was put in place.
According to a recent GOBankingRates study, 148.1 million tax returns in 2016 had an average of $14,760.92 in deductions. In 2017, the standard deduction for single filers was $6,350, while the deduction for married filing jointly was $12,700. That means that the average filer in 2016, according to the data, would have qualified for itemized deductions.
For tax newbies, if you add up all of your deductions and they total more than the standard deduction, you can itemize your deductions for bigger tax savings. Below the standard deduction, you are better off taking the standard deduction — a number everyone can deduct from their income before calculating taxes owed.
More on Bigger Savings: Tax Deductions 2018: 42 Tax Write-Offs You Don’t Know About
Under the new tax law, the standard deduction for single filers is $12,000, and married filing jointly is $24,000. That means that as a married person filing taxes for my family, I need at least $24,000 in deductions to go beyond the standard deduction level.
What Goes Into My Tax Deductions
Tax deductions for most people include things like home mortgage interest, charitable gifts, state and local income, sales tax, real estate taxes, medical expenses and unreimbursed employee business expenses, according to the study. For my family in Southern California, home mortgage interest and state taxes are my biggest deductions.
In 2017, I only owned my home for about half of the year and still had over $8,000 in mortgage interest. We also had a baby, so medical expenses were higher than usual. Once we added in property and state income taxes, charitable donations and some expenses related to my work, our deductions totaled $24,950 for my family.
For 2018, we are not having a baby but will own our home all 12 months of the year. That means we lose the medical deduction but have a higher home mortgage interest deduction. If last year’s taxes had been this year, we would have been just $950 above the line for itemized deductions over the standard deduction.
Related: 18 Medical Expenses You Can Deduct From Your Taxes
We won’t really know until calculating our taxes this year. It’s anyone’s guess as to which method will work best.
Always Do the Math on Your Deductions
If you don’t own a home and are single, odds are you won’t have more itemized deductions than the standard deduction provides. However, you don’t know for sure unless you do the math. Everyone should add up their deductions each year to be certain of which method gives them the best financial results.
For my family, we may inch past the line and file with itemized deductions this year, but I won’t know until I get my tax forms from my mortgage, add in charitable contributions, and include my state income taxes and property taxes. I have done my taxes myself for the last few years.
Whether you love it, hate it or don’t care, the 2017 tax law will have a major impact on your 2018 taxes and beyond. Make sure you’re ready so you get the best results.
Click through to read more about why this author files his own taxes.
More on Tax Laws
- How Much Money Gets Taken Out of Paychecks in Every State
- These 15 Countries Pay More in Taxes Than Americans
- How Much Money You Would Have If You Never Paid Taxes
- Watch: How to Legally Cheat Your Tax Bracket
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