By Charles Brown
The Tax Cuts and Jobs Act has some major changes affecting itemized deductions for 2018 income tax returns.
Individuals filing as married filing jointly (MFJ) now have a $24,000 standard deduction and those filing as single or married filing single (MFS) have a $12,000 standard deduction. To itemize on Schedule A, you would have to exceed these dollar amounts, or just take the standard deduction.
For Schedule A, itemized deductions typically include unreimbursed medical expenses; interest and property taxes on your personal residence; state, local and foreign income taxes; general sales tax; and charitable donations.
Medical expenses must be reduced by 7.5% of your adjusted gross income, and you only get to use the remainder as an itemized deduction. For mortgage interest to be deducted, it now must be secured by the qualifying residence. Home equity loans not used to buy, build or substantially improve the qualifying residence are no longer deductible. In addition, interest on a vacation home is no longer deductible. Interest expense used for your farming operation is still 100% deductible on your Schedule F.
State, local property deduction
A maximum of $10,000 has been placed on the combined total of state and local property taxes and state and local income taxes for MFJ and $5,000 for MFS. For example, if the total of your state income tax and property taxes paid on your personal residence total $12,000, you are only allowed to use the maximum of $10,000 as an itemized deduction.
All itemized deductions that were subject to 2% of your adjusted gross income, such as unreimbursed employee expenses, tax preparation expense, safe deposit box rental, hobby expenses, and investment fees and expenses, are no longer included as itemized deductions.
The limit for cash charitable contributions has been raised from 50% of adjusted gross income to 60% of adjusted gross income. Amounts over 60% can now be carried forward five years.
Change in charitable tax deduction
The new standard deduction of $24,000 for MFJ means many farmers will no longer be able to itemize and will just use the standard deduction. Money given to charities, while benefiting charities, may not increase tax deductions.
Farmers have a unique opportunity in the ability to gift inventory such as grain to a charity. The farmer does not receive a charitable deduction for the gift of grain, but they also are not reporting the sale of the grain and paying income and self-employment tax on the sale. The farmer will still get the $24,000 standard deduction if filing MFJ.
There is a right and a wrong way to make this gift. The key is ownership of the grain must be transferred to the charity before the grain is sold. Grain can be delivered to the grain merchandizer and a scale ticket or warehouse receipt should be made out to the charity. Then someone from the charity should arrange with the grain merchandizer when to sell the grain.
The farmer does not need to reduce his production costs of raising the grain gifted, even if gifted in the year it is raised, if gifted to a qualified charity. This also works for C corporations, which are limited to 10% of taxable income for cash contributions. The farmer shouldn’t just deliver grain to the grain merchandizer and tell them to make a check out to the charity.
Always check with you tax preparer for guidance when making tax planning decisions.
Brown is an Iowa State University Extension farm management specialist in southeast Iowa. Contact him at [email protected].