The Tax Cuts and Jobs act of 2017 signaled the largest tax reform in decades. The law includes numerous changes to both personal and corporate taxes. We discussed the most important changes relevant to you a few months ago in Five Changes to Be Aware of Under the 2018 Tax Reform.
One of the most promoted aspects of this plan was the doubling of the standard deduction to $24,000 for joint filers and $12,000 for single filers. While this may provide additional tax savings and simplify filing for some taxpayers, it also reduces the potential tax savings provided by certain expenses such as medical expenses, charitable donations, or home mortgage interest. As a result of these changes, certain tax strategies are more valuable than ever to make the most of your expenses.
Health Savings Accounts
Medical expenses have always had a high threshold to meet before they will provide a tax benefit. Generally, medical expenses can only be deducted when they exceed 10% of your adjusted gross income(this was temporarily reduced to 7.5% for 2017 and 2018), and even then only the portion that exceeds that threshold can be deducted. This means that if you earn $100,000 and you have $12,000 in medical expenses you will only be able to deduct $2,000. With the increased standard deduction, you will have a harder time taking advantage of your medical expenses even when you manage to exceed the 10% threshold. The best way to bypass these heavy requirements for medical expenses is to set up a Health Savings Account. An HSA allows you to save up to $7,000 per year for medical expenses and deduct the full amount, without worrying about the 10% threshold or itemizing deductions. For more information on HSAs you can read Avoiding the 10% Threshold for Medical Expenses.
If you make significant charitable contributions each year you may want to consider setting up a donor-advised fund to maximize your tax benefits. A donor-advised fund is a separate account that you make contributions to and then distribute those funds to the charity of your choice. How does this help you with your taxes? With a donor-advised fund you receive the tax deduction when you contribute to the fund, not when you make distributions to charitable organizations. This allows you to maximize your deduction by contributing a large amount to the fund in one year and spreading the distributions over 2 or more years. By properly staggering your contributions to the fund you can avoid the limitations on your deduction created by the increased standard deduction. For more information on how a donor-advised fund could reduce your taxes please contact us.
Home Office Deduction
If you run your own business or if you own rental property then you may be eligible to take a deduction for a home office. This will allow you to deduct a portion of your mortgage interest, real estate taxes, utilities and home-owners insurance. While this deduction is not new for 2018, the potential benefits it provides are greater than ever due to the increased standard deduction likely limiting the benefits of itemizing your mortgage interest and real estate taxes as a personal deduction. For more information on the home office deduction you can read Unlocking the Missed Deductions of a Home Office.
One of the goals of the tax reform was to simplify the filing process. While this goal may have been achieved for some taxpayers, maximizing your tax deductions in 2018 requires more creativity and critical planning than ever before. With the increased standard deduction and the additional restrictions on itemized deductions, the actual tax benefit of many expenses has been greatly reduced. By implementing some of the strategies discussed in this article you can continue to realize meaningful tax savings from these expenses.