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Will Itemizing Still Make Sense Under the New Tax Law?

Below, noted tax expert Andrew Friedman offers insights on how the new tax law could affect your financial decisions throughout the year

As principal and founder of The Washington Update, Mr. Friedman is not affiliated with Merrill Lynch. Opinions provided are his, do not necessarily reflect those of Merrill Lynch and may be subject to change. Neither Merrill Lynch nor its advisors provide legal, tax or accounting advice. Please consult your tax advisor about the insights provided here.
Transcript of Video


IF YOU’RE ONE OF THE 30% OF TAXPAYERS accustomed to claiming individual deductions on your tax returns, your biggest question for the 2018 tax year may be whether or not to keep itemizing.

With the standard deduction nearly doubling to $24,000 for married couples ($12,000 for single filers), and new limits on individual deductions, the House Ways and Means Committee estimates that fewer than 10% of taxpayers will choose to itemize under the new tax law. While the changes shouldn’t have affected your 2017 returns, it’s important to start thinking now about whether itemizing will make economic sense for 2018 and beyond, says noted tax expert Andrew Friedman1, principal and founder of The Washington Update.

The decision could affect everything from when you choose to have that elective surgery to how much you spend on a new home this year. “Unless your individual deductions exceed the standard deduction,” Friedman says, “you’re really not going to get a benefit from incurring individual expenses that might be deductible.” Below he shares more insights on when it might make sense to itemize.

"Large expenses, such as for health care or charitable gifts, could make itemizing the way to go." —The Washington Update’s Andrew Friedman

New limits. Deductions for state and local income and property taxes are capped at a total of $10,000. If you purchase a home, you can deduct interest on only $750,000 of mortgage debt, down from $1 million (existing mortgages are unaffected). Each of these limits makes it that much less likely that itemizing would exceed the value of the standard deduction, Friedman says.

When itemizing still pays. Large expenses, such as for health care or major charitable gifts, could make itemizing the way to go, Friedman adds. For 2017 and 2018, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (in 2019 that figure rises to 10%). As for giving, the law allows you to deduct donations totaling 60% of your annual income, up from 50%.

With a law as complex as this, the decision on whether or not to itemize is a personal one, Friedman says. Be sure to work with your tax specialist. And speak with your financial advisor about how the bill may affect your financial goals.

To learn more about how the new tax law could affect you, read "Tax Reform & Your Life: What’s Changed?” and check out Andrew Friedman’s whitepaper, “Tax Reform Accomplished: How Does the Legislation Affect Investors and Businesses?”


3 Questions to Ask Your Advisor

  1. Are there any investing strategies that could help to minimize my taxes?
  2. Will I still be able to afford to give as much to my favorite causes?
  3. I plan to purchase a new home soon. How large a mortgage should I consider, given the new deduction limits?

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1Andrew H. Friedman, principal and founder of The Washington Update, is an outside tax authority, and is not affiliated with Merrill Lynch or any of its affiliates.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Always consult your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.

This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or financial instrument. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of issue.

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