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For many years, the standard deduction was a tax benefit rarely utilized by moderate to high net worth taxpayers, simply because their itemized deductions outweighed the standard deduction. Under the recently enacted tax plan, however, this may change significantly.

The Elimination of Itemized Deductions

The new tax bill has eliminated many of the popular itemized deductions, leaving only the following:

  • Deduction for charitable contributions;
  • Deduction for payment of State and local taxes (limited to $10,000);
  • Home mortgage interest expense deduction (up to $750,000);
  • Deduction for medical expenses not covered by insurance (capped at 7.5% of AGI);
  • Deduction for interest expense incurred in connection with investment income; and
  • Deduction for casualty losses in a federally declared disaster area.
In addition to the removal of numerous popular itemized deductions, the new tax plan doubles the standard deduction to the following figures for 2018:
  • For married couples filing jointly: $24,000
  • For heads of household: $18,000
  • For single individuals: $12,000
For many taxpayers, especially those who are married, it is now less likely that the combination of the six itemized deductions above will exceed the applicable standard deduction number. However, the itemized deduction that provides the most leeway for planning under the new income tax regime is the deduction for charitable contributions. Specifically, if the funds are available to the taxpayer, charitable contributions for more than one year can be “bunched” together and paid in the same year, if such contributions would put the taxpayer above the standard deduction threshold.

An Example of Tax Deductions in Action

Consider the following example:
  • Taxpayers are married filing jointly
  • Taxpayers are Florida residents
  • Annual home mortgage interest expense: $10,000
  • Annual charitable contributions: $12,000

The fact pattern for the above example results in $22,000 worth of itemized deductions for the taxpayers, which falls below the standard deduction number of $24,000. Alternatively, if the taxpayers decide to bunch two years’ worth of charitable contributions into one year, the result would be itemized deductions of $34,000 ($24,000 for charitable contributions and $10,000 for mortgage interest) resulting in $10,000 in added deductible expenses. In the following year, the taxpayers will receive a benefit of $14,000, since they only have $10,000 of itemized deductions but have the ability to deduct the $24,000 standard deduction.

Additionally, to make matters more efficient, such a bunching of contributions can be utilized in conjunction with a donor-advised fund. A donor advised fund is a charitable fund controlled by the donor. The deduction for the charitable contributions can be made in the year of the contribution, however, distributions from the donor-advised fund to the actual charities can be paid out over the following years.

Contact Top Boca Raton Tax Attorneys Today

Contact Morris Law Group today to schedule your first consultation with one of our top South Florida tax planning attorneys and discuss planning techniques available under the new tax plan.

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