Maximize Your Personal Itemized Deductions
The Tax Cuts and Jobs Act (TCJA) has brought about several changes in the area of personal itemized deductions which has likely left many taxpayers wondering how they can maximize their itemized deductions. In effect for 2018 through 2025, several deductions categorized as “miscellaneous itemized deductions,” which were once deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income (AGI), are no longer deductible as a personal itemized deduction under the TCJA. These nondeductible miscellaneous itemized deductions include unreimbursed business expenses, investment expenses, and tax preparation fees. Unreimbursed business expenses include expenses such as work-related travel and meals, union dues, work-related education, home office expenses, dues to professional societies, and other business related expenses which the taxpayer must pay for. Investment expenses include investment advisory and management fees, rental fees for safe deposit boxes, and fees for legal and tax advice related to your investments.
Along with the elimination of miscellaneous itemized deductions, state and local taxes have been capped at $10,000 by the TCJA. This means that taxpayers can deduct state and local real estate taxes, personal property taxes, and income or sales taxes only up to $10,000. The TCJA also limited the deduction to home mortgage interest on the first $750,000 of mortgage debt which is reduced from the pre-TCJA limit of $1 million of mortgage debt. Medical expenses have also been limited further by the TCJA. Under the TCJA, taxpayers may deduct unreimbursed medical expenses that exceed 7.5 percent of their AGI, rather than 10 percent of AGI which was the pre-TCJA floor. With these eliminations and limitations placed on itemized deductions, how can taxpayers still maximize their deduction by itemizing? The answer is charitable contributions.
Prior to the TCJA, the limitation on deductible cash charitable contributions was 50 percent of your AGI. The TCJA increased the limit on deductions for cash charitable contributions to 60 percent of AGI, meaning you can take even more deduction for charitable contributions. This means that a taxpayer with an AGI of $100,000 can deduct charitable contributions of up to $60,000.
Make the most of your charitable contributions and increase the total above the standard deduction with the following strategies:
- Make sure the charity is a registered 501(c)(3) organization which is tax-exempt. Amounts paid to organizations which are not a registered 501(c)(3) organization will not count toward your charitable deduction amount.
- Bundle your donations. Instead of donating $5,000 each year to a qualifying charity, donate that amount every other year or every three years to have a total annual donation of $10,000 or $15,000. This way, you get the advantage of itemizing your deductions in the year you donate more, and taking the standard deduction in the off years.
- Donate appreciated stock. With this form of charitable giving, you are able to avoid capital gains tax by donating stocks or other appreciated assets that have grown in value over time while also increasing your chance of itemizing your deductions.
- Make a qualified charitable distribution from an IRA. Retirees who are 70 ½ or older can transfer money from their IRA to a qualifying 501(c)(3) charity instead of taking a required minimum distribution. This distribution will count toward your charitable contributions for the year, limited to 60 percent of your AGI.
With the standard deduction nearly doubling with the TCJA, many taxpayers are finding themselves taking the standard deduction rather than itemizing since the itemized deductions have lower limitations than pre-TCJA times. However, with the charitable giving strategies mentioned above, many taxpayers can increase their overall deductions by itemizing.