Maximizing Your Deductions Under the New Tax Law
As the saying goes, the only two certainties in life are death and taxes. And while the former is unavoidable, the latter is something that you can prepare for to minimize its impact on your financial well-being. With the recent changes in the tax laws, it's important to stay informed about your options for maximizing your deductions. In this article, we'll explore some of the key deductions available under the new tax law.
Standard Deduction vs. Itemized Deductions
One of the first things to consider when maximizing your deductions is whether to take the standard deduction or to itemize deductions. The standard deduction is a fixed amount that is subtracted from your taxable income. For 2020, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly. If your deductible expenses are less than the standard deduction, it may be better to take the standard deduction.
However, if your deductible expenses exceed the standard deduction, you may choose to itemize deductions. This allows you to deduct individual expenses, such as mortgage interest, property taxes, and charitable donations. With the new tax law, the standard deduction has been increased, but several itemized deductions have been eliminated or reduced. Therefore, it's important to review your expenses to see if itemizing is still the best option for you.
Mortgage Interest Deduction
One of the most significant deductions for homeowners is the mortgage interest deduction. Under the new tax law, you can deduct the interest paid on mortgages up to $750,000. This is a reduction from the previous limit of $1 million. However, if you had a mortgage before December 15, 2017, you can still deduct interest on loans up to $1 million.
It's important to note that the mortgage interest deduction is only available if you itemize deductions. Additionally, the deduction is only available for your primary residence and one additional home. If you have a rental property, you may still be able to deduct mortgage interest, but it will be included in your rental expenses on Schedule E.
State and Local Taxes Deduction
Another significant change under the new tax law is the limitation on the state and local tax deduction (SALT deduction). Previously, taxpayers could deduct state and local income, sales, and property taxes in full. Starting in 2018, the SALT deduction is limited to $10,000 per year.
This limitation primarily affects taxpayers in high-tax states, such as California, New York, and Connecticut. If you live in one of these states, you may need to adjust your tax planning to minimize the impact of this change. For example, you may consider pre-paying property taxes to maximize your deduction in certain years.
Charitable Donations Deduction
Another deduction that remains available under the new tax law is the charitable donations deduction. This allows you to deduct donations made to qualified charitable organizations. However, several changes have been made that may affect your planning.
First, the deduction is only available if you itemize deductions. Second, the limit on cash donations has been increased from 50% to 60% of your adjusted gross income (AGI). This means that you can deduct up to 60% of your AGI in cash donations.
Additionally, the standard deduction has been increased, which means that fewer taxpayers will itemize deductions and take advantage of the charitable donations deduction. However, you may still be able to maximize your deduction by grouping donations into a single year or donating appreciated assets, such as stocks or real estate.
Conclusion
Maximizing your deductions under the new tax law requires careful planning and analysis of your expenses. It's important to review the changes in the tax law and how they affect your deductions. If you're unsure about your options, it's a good idea to consult with a qualified tax professional. With proper planning, you can reduce your tax liability and keep more of your hard-earned money in your pocket.