ITEMIZED DEDUCTIONS VS. STANDARD DEDUCTIONS
Each year when you file a tax return, the IRS allows you to take either a standard deduction amount, or itemized deductions. This means that you are able to deduct a certain amount from your adjusted gross income in order to arrive at your taxable income. For example, let’s say a married couple made an adjusted gross income of $100,000 and the IRS standard deduction for a couple is $24,800. This couple would be able to deduct the $24,800 from the $100,000 to arrive at a taxable income of $75,200. This standard deduction is granted with no questions asked, no receipts required. If you’re someone that doesn’t have a lot of itemized deductions, the standard deduction may be your best option.
Let’s say you keep track of all your eligible receipts, and your itemized deductions total $32,000. Based on the $100,000 adjusted gross income, your taxable income would be only $68,000, meaning that you pay less taxes vs the $75,000 taxable income. In this case, you would absolutely want to utilize the itemized deduction option. Keep in mind that you need to stay on top of your record keeping, and supply all required documentation to your tax preparer with this option, as well as keep copies of all records in case the IRS ever wants to see proof.
Now, you’re probably wondering what is eligible for an itemized deduction. Since we’re discussing home ownership – property taxes and mortgage interest are some of the things that can be itemized. In addition, medical expenses over a certain percentage of your income can be itemized as well as charitable contributions.
TAX CUTS & JOBS ACT AND THE SALT TAX
As a result of the Tax Cuts and Jobs Act, you are no longer able to itemize every single dollar that you pay towards your property taxes in excess of a certain amount. In fact, there is now a $10,000 cap for a married couple on what they call the SALT tax (state and local tax). Previously if a couple paid $25,000 between state income tax and property taxes, they were able to use that as an itemized deduction. On top of that, they would have been able to include mortgage interest, charitable contributions, etc. This was very helpful as it significantly reduced taxable income. Now let’s say you and your spouse are living in a high-income tax state such as New York or California. Even if you had $40,000 in deductions from your property taxes and state income tax, you’re now capped at the $10,000 figure per the Tax Cuts and Jobs Act. Therefore, some of the benefits of owning a home from a tax perspective are not as significant anymore.
Mortgage interest can still be used as an itemized deduction with some limitations, but with the $10,000 cap on the SALT tax, the overall deduction isn’t as large. These are some of the things you have to take into consideration before purchasing a home. Many people automatically assume that it will provide a large tax break, but that may not be the case. This is when you would want to consult your accountant or Certified Financial Planner™ Professional, as they can assist you with tax planning.
Have you done any work on your house due to medical reasons? Well if so, you may receive a tax deduction for renovation expenses. Do you have solar panels on your home? This may be eligible for a tax credit as well. Are you considering selling your home? Have you made any home improvements? Let’s say you spend $10,000 in home improvements. Generally speaking this is not eligible for a tax deduction in the same year. However, the $10,000 will be taken into consideration when you go to sell your home. If you purchased a home for $250,000 and spent $10,000 in home improvements, your cost basis (total investment in your house) is $260,000. The IRS will take into account the initial purchase of your home plus any improvements you made throughout the years, to determine if any gain on the sale of your house is considered a taxable capital gain.
If you own a primary residence that you’ve lived in for the past 2 out of 5 years, you can sell that property as an individual with a gain of up to $250,000 without having to pay taxes on it. As a married couple, you can sell your primary residence for up to a $500,000 profit with 0 taxes due on that amount. This is one of the potentially great tax benefits of owning and selling a home. Again, this is something that an accountant or Certified Financial Planner™ Professional can provide guidance on.
DO I NEED A CERTIFIED FINANCIAL PLANNER™ PROFESSIONAL?
Probably. There is a common misconception among people who believe that only high net worth individuals need a Certified Financial Planner™ Professional, which could not be further from the truth. Almost every single person can benefit from a Certified Financial Planner™ Professional whether you are a high net worth individual, just starting out on your financial journey, or simply in need of some guidance.
If you are interested in working with a financial planner, and I highly recommend that you do, please check out my website www.BuildABetterFinancialFuture.com as I offer complimentary 30 minute calls to discuss your finances and understand how I may be of assistance to you. Also, you can check out the resource area on my website for additional information.
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