The Tax Cuts and Jobs Act (TCJA) brought major changes in 2019. Here’s what you need to remember as you prepare your tax returns.
1. Why itemize?
When it comes to deductions, you generally want to choose the option that lowers your taxable income the most.
The standard deduction is a fixed amount, while itemized deductions are made up of a list of eligible expenses.
Expenses that qualify for itemized deductions include qualified mortgage interest, state and local income taxes, medical and dental expenses, and charitable contributions.
2. Standard deduction
If you’re married and filing jointly, your standard deduction for 2020 will be $24,800 (plus $1,300 per person age 65 or older). If you’re single or filing as an individual, your standard deduction will be $12,400 (plus $1,650 if age 65 or older).
Prior to the TCJA, the standard deduction was $12,700 for married couples filing jointly and $6,350 for those filing as an individual.
3. Tax rates
The rate at which your income is taxed can play a role in whether you choose standard or itemized deductions.
There are seven tax brackets, ranging from 10-37%. The highest bracket for single filers and married couples filing jointly begins with taxable incomes over $518,400 and $622,050, respectively.
4. Mortgage interest
The cap on mortgage debt that you can take interest deductions on is $750,000, down from $1 million. This applies to mortgages taken after December 15, 2017.
5. State taxes
The itemized deduction for state taxes is capped at $10,000, where in past years there was no limit.
Residents of high tax states like California, New York and New Jersey will have a more difficult time surpassing the standard deduction because of that limitation.
6. Medical and dental expenses
You’re allowed to deduct qualified, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. Medical expenses for which you’ve been reimbursed by your insurance or employer cannot be deducted.
Qualified expenses include surgeries, preventive care, treatment, dental and vision care, and prescription medications.
7. Charitable deductions
Contributions to qualified charities are still fully deductible, but you may have to approach your giving strategy differently to take advantage of the tax benefits.
For example, if you bunch your donations into one year instead of multiple, you’re more likely to exceed the standard deduction.
8. Only one way to find out
There’s no substitute for running the numbers. Look at your mortgage interest expense, charitable donations, medical expenses and state deductions. This is where significant out-of-pocket medical expenses or charitable donations might play the biggest role.
9. What should you do?
If your deductions put you over the standard deduction threshold after running the numbers, then itemizing will work for you. If you’re below the threshold, taking the standard deduction will make more sense.
Read more tax tips for year-end financial planning.