When it comes to tax deductions, the 2018 changes to the tax law not only raised the standard deductions, but also reduced or eliminated specific deductible expenses. So can itemizing still make sense? It’s really all about the numbers.
If you choose the standard route, the deduction limits nearly doubled in 2018 and have continued to increase. On income earned in 2020, you are eligible for a $12,400 deduction or, if you are married filing jointly, $24,800. If you have itemized in the past, you may want to make sure that the total of your itemized deductions is substantially more than the standard deduction limits.
Let’s look at changes the 2018 tax law made to some of the biggest itemized deductions. The state and local tax on your income and property, known as SALT, has often been a substantial deduction. It’s been capped at $10,000, and may especially affect you if your income is higher or you live in a state with high property and income taxes.
When it comes to your mortgage interest, you can still deduct it, but on new purchases, the previous $1,000,000 limit has been reduced to $750,000.
There was also a change to your home equity loan. It’s no longer deductible, unless you use it to improve your home. Use it for anything else, like a child’s education or a car, and you can’t deduct the interest. And this change applies to existing and new loans.
Additionally, the $750,000 interest limit includes your mortgage and your home equity loan used to improve your house. In the past there was a 3% overall limitation on itemized deductions, called the Pease Limitation, but that limit was suspended, so if you itemize, be sure to include all your deductions to help ensure you get the maximum tax benefit.
So run the numbers to see if your itemized deductions exceed the standard deductions. If you are close, you may find that taking the standard deduction not only saves you time but also the expense of using a tax preparer. To learn more about the new tax law, watch the other videos in this series, or, visit schwab.com/tax strategies.