For approximately 30 percent of Americans who itemize their tax deductions, change may be coming. Charitable giving, mortgage interest and medical expenses might offer fewer tax benefits if reforms pass in 2017.
Most of the tax reform proposals offset lower income-tax rates with reductions in the value of deductions. Because of this year-end planning by high income families should look at the potential of making significant charitable gifts in December to receive the most value.
Fewer benefits from itemizing
It doesn’t come as a surprise that the number of people who itemize their deductions increases with higher earnings. The Wall Street Journal has a nice breakdown of the percentages and average deductions for different income brackets. For example, almost 77 percent of those who earn between $100,000 and $200,000 itemize rather than take the standard deduction.The average deduction amount is $26,000.
The standard deduction for 2016 is $6,300 for an individual and $12,600 for a married couple. Itemizing thus can have a real benefit. A plan proposed by Paul Ryan would double these amounts. President-elect Donald Trump has suggested raising them to $15,000 for single filers and $30,000 for joint filers.
In addition, caps on itemized deductions have been discussed. For instance, Trump would limit itemized deductions to $200,000 for couples. Certain categories may also be eliminated such as the deduction for state and local taxes.
What to do by year end?
The Wall Street Journal provided a couple tips:
- Speed up major charitable gifts – consider donor advised investment funds that have been increasing in popularity.
- But don’t make advance mortgage payments, because you can’t take a deduction for prepaying on mortgage interest.
A tax attorney can provide more guidance in developing the best strategy to meet your unique needs while taking into account possible changes to the tax code.