Key Takeaways

Expect significantly higher standard deductions for 2018 due to new tax laws

Itemizing deductions may no longer make sense for many taxpayers     

Learn how the new tax code affects specific deductions such as mortgage interest and alimony

As you receive your 2018 tax documents such as W-2s and 1099s, you’re likely starting to put your receipts in order ahead of this year’s April 15 tax filing deadline. Now may also be a good time to think about how deductions can benefit you. 

One of the biggest decisions taxpayers will face is whether to take the standard deduction or itemize. New tax code changes take effect for the 2018 tax year that include a higher standard deduction. Many taxpayers who regularly itemize may find that the new standard deduction could be a better option this year.

This Year’s Deduction Rules

For 2018 returns, the standard deduction is $12,000 for single filers, while for those who file as head of household, it’s $18,000. For married people who file jointly or for qualified widows, the exemption for 2018 is still $24,000.

The new tax law brings several changes to what you can deduct if you are itemizing. For example, it limits how much homeowners can deduct for mortgage interest and real estate taxes. There’s a $10,000 combined total deduction limit for income, state, and property taxes. Also, taxpayers can deduct the interest on up to $750,000 of mortgage debt. That’s down from the previous cap of $1 million. 

In other changes, you may no longer deduct interest on home equity loans—with certain exceptions given for large home improvements—whereas you were able to deduct interest on up to $100,000 of that debt last year. You may no longer deduct losses from theft, when previously you could deduct losses that totaled more than 10% of your gross adjusted income. Deductions for moving expenses and miscellaneous expenses such as tax preparation costs or job searching costs have also been eliminated.

These key changes may make it trickier for some people to gather enough deductions to itemize for 2018’s returns. Consider itemizing if your individual deductions total more than the standard deduction. For example, itemizing may work in your favor if you had large, unreimbursed medical bills or if you made significant contributions to charities in 2018.

To help you determine whether you should take the standard deduction or itemize deductions, create an itemized deductions worksheet. If you have 2017’s returns handy (and you should get those out anyway), look at the Schedule A to identify what you did for last year’s returns.

When Itemizing Is a Better Option

To itemize for 2018 taxes, the taxpayer’s total itemized deductions should exceed the standard deduction under their current filing status—married filing jointly or qualifying widow, single, head of household, or married filing separate.

You can still deduct state and local income or sales taxes, real estate taxes, personal property taxes, and mortgage interest. You may also still deduct contributions to a qualified retirement account like an Individual Retirement Account (IRA), as well as up to $2,500 in interest paid on student loans.

If you do itemize deductions, you can still take the charitable deduction. Under the new law, the deduction limit is now 60% of the taxpayer’s adjusted gross income for cash and gifts, up from 50% previously. In addition, taxpayers can carry that deduction forward for up to five years. So, if your donations do not exceed the standard deduction for this year, you can possibly roll them over for up to five years until you accumulate enough to make itemizing worthwhile.

However, you can’t plan to roll over all your deductions for itemizing later. For example, that doesn’t work with mortgage payments, because the deductible interest paid on the mortgage is filed to the IRS, so lenders must report the interest paid and the balance of the mortgage for that year.

What other individual deductions can you can take for 2018 taxes? You can deduct medical expenses up to 10% of your adjusted gross income. For those giving or receiving alimony payments, the taxation obligation has essentially reversed. Previously, those paying alimony could deduct that amount, and the payment would be subject to taxation by the recipient. Under the new code, the deduction is eliminated for the person paying, whereas the payment for the person receiving it is tax exempt.

Considering all the tax code changes related to itemizing, this year might be the time to lean on a tax professional for clarity on how the new tax rules will affect your deduction strategy.

TD Ameritrade does not provide tax advice. Clients should consult with a tax advisor with regard to their specific tax circumstances.

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