5 common tax misconceptions to avoid
Tax year 2018 marks the first year of the updated tax code under the Tax Cuts and Jobs Act of 2017.
While the legislation has been discussed extensively over the past year, some taxpayers still have misconceptions about the changes.
Here are some commonly held — but often mistaken — beliefs about the new tax code.
While many popular deductions have been eliminated, the charitable deduction remains in place.
“People are confusing the charitable deduction with the standard deduction going up,” says Amy Pirozzolo, Fidelity Charitable’s head of donor engagement.
That’s probably because fewer people will be able to claim the charitable deduction now that the standard deduction has been increased.
Charitable contributions are still deductible, but only as an itemized deduction. To itemize, taxpayers need combined itemized expenses that are greater than the standard deduction.
But tax reform doubled the standard deduction, up to $12,000 from $6,000 for single filers, and to $24,000 from $12,700 for those who are married filing jointly. That means more people are likely to take the standard deduction instead of itemizing.
“The charitable deduction will be used more heavily to help married couples to get over the $24,000 threshold,” says Bob Falcon, and CPA and certified financial planner with Falcon Wealth Managers.
“I will probably itemize”
While that may have been true in the past, an overwhelming majority of taxpayers won’t, going forward.
About 90% of taxpayers are estimated to be able to claim the standard deduction this year, according to Turbo Tax. That’s 20% more people than last year.
“The standard deduction increased dramatically from 2017,” says Deborah Meyer, a CPA and certified financial planner with WorthyNest.
Plus, the amount of possible deductions to itemize has been sharply reduced. “The deduction for state, local and property taxes is capped at $10,000 for the 2018 tax year. In 2017, you could have claimed unlimited state, local and property tax if you were itemizing other deductions,” Meyer says.
Interest on home equity lines of credit (HELOCs) was previously deductible, as well as interest on mortgages up to $1 million. Now, the mortgage interest deduction on primary and secondary residences only applies to loans under $750,000. And taxpayers can no longer deduct interest on HELOCs used to pay personal expenses (like student loan and credit card debt).
Although medical expenses exceeding 7.5% of income are deductible if you’re itemizing in 2018, that’s only going to impact a very small portion of people.
“With the enhanced standard deduction and cap on deductible taxes, you are more likely to claim the standard deduction in 2018,” says Meyer. “Families with large mortgages and or significant charitable contributions may still itemize, but it will be on a case-by-case basis.”
To better understand where your personal situation may fit, TurboTax has a free Standard vs. Itemized Deduction tool.