Tax reform talk is heating up again as legislators discuss the proposed tax code overhaul. One of the key proposals would repeal most itemized deductions currently on the books. Although enactment is hardly guaranteed, taxpayers should be aware of the potential impact.
Under current law, some of the most popular itemized deductions include the following:
- Donations made to qualified charitable organizations are deductible under generous limits, subject to strict substantiation requirements.
- State and local taxes, including income taxes and property taxes, are fully deductible. State and local sales taxes may be deducted in lieu of income taxes.
- Qualified mortgage interest, including amounts paid on an acquisition debt up to $1 million, is deductible.
- Investment interest may generally be deducted up to the amount of your net investment income for the year.
- You can deduct the excess unreimbursed medical and dental expenses above 10 percent of your adjusted gross income (AGI) for the year.
- You can deduct the excess miscellaneous expenses (e.g., unreimbursed employee business expenses and tax advisory fees) above 2 percent of your AGI for the year.
- You can deduct unreimbursed casualty and theft losses above 10 percent of your AGI for the year (after subtracting $100 for each casualty and theft loss).
Under the proposed House plan unveiled on Nov. 2, the deduction for charitable donations and disaster-area casualty losses would be preserved, while certain modifications would be made for mortgage interest and state and local property tax deductions. Other itemized deductions would be repealed. The standard deduction, however, is likely to be doubled for 2018 and subsequent years.
Consideration should be given, then, to planning your expenditures in such a manner as to maximize your tax savings over multiple years. For example, bunching your remaining itemized deductions in either even or odd years and taking the standard deduction in the other years may reduce your taxes over time.
