While people are itemizing less often, there still could be some additional tax savings.
With the passing of the Tax Cuts and Jobs Act (TCJA) of 2016, several changes were made that significantly reduced the number of tax filers itemizing their deductions: the most noteworthy being the doubling of the standard deduction and creation of the SALT (State and Local Taxes) cap.
The TCJA increased the standard deduction from $6,500 to $12,000 for individual filers, $13,000 to $24,000 for married filing jointly, $9,550 to $18,000 for heads of households in 2018.
The SALT cap limited the deductible amount of state and local real estate, personal property, and either income or sales taxes in tax years after 2017 to $10,000 per year. For clients in states with high income and property taxes, this was a significant limitation to their income tax deductions.
For 2024, the standard deduction is $14,600 for single filers, $21,900 for head of households and $29,200 for married filing jointly. An additional deduction is applied for elderly or blind at $1,950 if single and $1,500 per person if married.
Given the 2024 standard deduction of $29,200, what would it take to itemize deductions? The most common itemized deductions are state and local taxes, including property taxes, mortgage interest and charitable giving.
Let’s make the following assumptions for two married Connecticut residents in 2024:
Couple 1:
- Annual income of $100,000 – 5% marginal income tax bracket – total Connecticut tax $4,600.
- Annual property taxes of $3,000.
- Refinanced their $300,000 mortgage in January 2021 to a 15-year at 3.00%. Interest paid in 2024 is $7,268.
- Charitable contributions of $1,000.
Their state income taxes and property taxes total $7,600, well below the SALT cap of $10,000. Their mortgage interest of $7,268 and charitable contributions of $1,000 are fully deductible. Their total deductions for 2024 are $15,868, well below the standard deduction of $29,200. It is clearly in this couple’s best interest to take the standard deduction.
Couple 2:
- Annual income of $200,000 – 5.5% marginal income tax bracket – total Connecticut tax $10,100.
- Annual property taxes of $9,800.
- Clients purchased a home with a $500,000 30-year 4.5% mortgage in January 2022. Interest paid in 2024 is $21,576.
- Charitable contributions of $6,000.
Their state income taxes and property taxes total $19,900, however, they are capped at $10,000. The home mortgage interest of $21,576 is deductible as well as the $6,000 of charitable donations. This will leave them with total itemized deductions of $37,576, giving them an additional deduction of $8,376 above the standard deduction of $29,200.
As mortgage interest rates have increased, the number of tax filers taking the itemized deduction will likely increase as their mortgage interest expense will increase.
What will happen in 2026 when the Tax Cuts and Jobs act sunsets?
Unless tax laws are revised, in 2026 all changes made will revert to approximate pre-TCJA levels. If so, couple 2 could deduct the full $19,900 of property and income taxes giving them a larger itemized deduction and significant savings over the newly reduced standard deduction amount. They may, however, end up in a higher tax bracket due to the reversion back to pre-TCJA federal income tax brackets.
Does anyone itemize anymore?
While the number of people itemizing has been significantly reduced, if a person can max out the SALT cap, has significant mortgage interest and charitable contributions, there still may be some additional tax savings.
Want to connect? Contact me at: 860-567-6407 or bangotti@unionsavings.com
