As you all probably know, a new tax law was enacted toward the end of December 2017 and took effect in 2018. There are some fundamental changes that will change how we see taxes, and they will affect the economy and decisions we make. We have all been talking about the ability to save money with 529 accounts. There is another part of the law, however, that has a far bigger effect on the frum community – and that is the ability to deduct charity. I’m not sure why we are not hearing more talk in the community regarding this one.
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What is income tax? What are tax deductions? How does it all work? Let’s review the basics of the old law. Step one: You add up your income. Step two: You deduct either a standard amount or your itemized list. Step three: You deduct (approximately) $4,000 for each person in the family. The result was your “taxable income.” You then paid a percentage of your taxable income in tax.
What changed: In the new law, you do not get to claim dependents. Kids are history – well, not exactly. In lieu of deductions for dependents, you get a child tax credit of $2,000 per child under 17 and $500 for other dependents.
Now let’s look at itemized deductions. The itemized deductions are: 1) medical expenses over 7.5% of your income, 2) real estate taxes, 3) state income taxes, 4) mortgage interest, and 5) charity. If the sum of these totals more than the standard deduction, you would claim the total instead of the standard deduction. That is called “itemizing.” Bottom line is that when people owned a house they generally itemized. Even a few non-home owners itemized if they had high state taxes and high charity.
You do not get to claim both the standard and the itemized deduction. It is one or the other. Obviously, you should itemize if it is higher. But if your itemized list is lower than the standard deduction, then you claim that. Now, here’s the important part: In the past, it was not hard to exceed the $12,600 standard deduction. The new law, however, is a whole different ballgame. The new law increased the standard deduction to $24,000. And, although the items included in your itemized deductions generally stay the same, state income taxes and real estate taxes combined cannot be more then $10,000. Ouch!