The Tax Cut and Jobs Act (TCJA) just signed into law by President Donald Trump sharply curtails your ability to claim itemized deductions after 2017.
So, you should try to accelerate itemized deductions from 2018 into 2017.
The TCJA raises the standard deduction to $12,000 for an individual and $24,000 for a married couple.
If your itemized deductions don't reach these amounts, then you wouldn't itemize your deductions, opting instead to use your standard deduction.
If you do itemize your deductions under the new law, your deduction for state and local taxes will be limited to $10,000 ($5,000 for a married taxpayer filing separately). You can use this deduction for state and local income taxes, sales taxes, and property taxes.
Another reason that itemized deductions are more valuable in 2017 than in 2018 is that the TCJA lowers tax rates effective January 1, 2018.
So, it likely is in your best interests to accelerate deductions for state and local taxes from 2018 to 2017. As a cash basis taxpayer, you can do this by paying state and local taxes by December 31, 2017.
For example, if you receive a winter real property tax bill by December 31, 2017, you should pay it by that date, even though it may not be due until later.
If you pay estimated state income tax, you should pay your fourth quarter, 2017 deposit by December 31, 2017, even though it is not due until January 15, 2018.
You can claim such taxes paid in 2017 as deductions on your 2017 federal income tax return.
The TCJA suspends miscellaneous itemized deductions, for eight years, from January 1, 2018 through December 31, 2025.
Miscellaneous itemized deductions are ordinary and necessary expenses paid or incurred for the production or collection of income, or in connection with the determination, collection, or refund of any tax.
Examples include but are not limited to:
- clerical help and office rent in caring for investments;
- fees paid to tax advisors or preparers, or to attorneys or accountants to represent the taxpayer in contested tax matters;
- appraisal fees for a casualty loss or charitable contribution;
- casualty and theft losses from property used in performing services as an employee;
- investment fees and expenses;
- repayments of income;
- safe deposit box rental fees, except for storing jewelry and other personal effects;
- trustee’s fees for an IRA, if separately billed and paid; business bad debt of an employee;
- business liability insurance premiums;
- damages paid to a former employer for breach of an employment contract;
- dues to a chamber of commerce if membership helps the taxpayer perform his job;
- dues to professional societies;
- educator expenses;
- home office or part of a taxpayer’s home used regularly and exclusively in the taxpayer’s work;
- job search expenses in the taxpayer’s present occupation;
- legal fees related to the taxpayer’s job;
- and licenses and regulatory fees.
If you have accrued but unpaid miscellaneous deductions, such as a balance of legal fees for services related to your job, or a balance owing to a tax advisor or tax representative, then you should consider paying such balances by December 31, 2017.
Such payments made in 2017 would be available for deduction a cash basis taxpayer’s 2017 federal income tax return, subject to the floor of two percent of your adjusted gross income. For this reason, some of my clients are replenishing their retainer with my firm by December 31, 2017.
Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog.
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