Wondering if it makes sense to itemize your California tax deductions this year? If you’ve been keeping up with the latest news, it’s easy to see why the subject of taxes is on everyone’s mind right now. Not just because we’re in the middle of tax season, but because this is the first year in which the sweeping tax rules changes of the Tax Cuts and Jobs Act (TCJA) come into effect.
Given the high housing costs in cities such as Los Angeles, San Diego and San Francisco, it’s no surprise that so many Californians are wondering about how they will be affected by the new tax law changes, and whether they will be able to deduct their property taxes.
Whether you’re in the process of filing 2018 taxes, or are about to do so, one thing you can be sure of is that this year will be a lot more different than past ones.
Standard vs itemized deductions
As always, you still have two tax deduction options: a standard deduction or an itemized deduction.
Standard tax deduction
- Fixed dollar amount you can deduct from taxed income.
- As to what the actual amount will be, it depends on a variety of factors such as your marital status, age, health, whether you’re filing jointly with your spouse, or if you’re the head of the household.
- For most people in 2017’s tax year, the standard deduction was $6,350 for single tax filers, and $12,700 for couples. Given that this option is less complicated, and most American tax payers don’t have enough IRS approved deductible expenses that exceeded the standard deduction, most tax payers take this route.
- In the case of itemized deductions, you are also allowed to lower your taxable income, but to do so you need to have incurred a number of expenses approved by the IRS on that tax year and list them on your tax returns (hence the name “itemized).
- Among the most commonly itemized expenses are medical expenses, charitable contributions, investment interest expenses, home mortgage interest, and State And Local Taxes (SALT).
- Itemized deductions are often considered an option that only the rich take, because the average American taxpayer doesn’t incur enough “itemizable” expenses in a year to exceed the total amount available in a standard deduction. But that wasn’t always the case.
Why are SALT deductions so important for Californians?
Though we readily admit to being a little biased about our state, we can’t deny that life in California is anything but standard. Given California’s high cost of living, expensive real estate, and some of the highest taxes in the country, being able to deduct property taxes, and state and local taxes (SALT) was one of the biggest perks of itemizing. To put it in perspective, the average SALT bill for Californians was around $18,000 in 2017. Given that couples filing taxes jointly could only deduct a maximum of $12,700 under the standard option, they would save at least $5,300 just from SALT alone if they chose to itemize.
That SALT deduction is nothing new though. Taxpayers have been able to deduct their SALT bill since the creation of the federal income tax in 1913. Under previous rules, it was possible to deduct 100% of your SALT bill. But that all changes this year, thanks to the Tax Cuts and Jobs Act (TCJA).
How does the TCJA changes to SALT deductions affect Californians?
Under the TCJA, SALT deductions are capped at a maximum of only $10,000. If your property taxes are $7,000, and you paid $8,000 in sales tax, you can only deduct $10,000, even if the total amount is $15,000.
As you may realize, this change disproportionately affects homeowners living under high property tax burdens, either because they reside in high property tax jurisdiction, or in an area with expensive real estate. In the case of California, we are living under both.
Are all California taxpayers negatively affected by the TCJA? If we’re only talking about changes in SALT deductions, most Californians will see little to no change. But in the case of the top 20% earners, some of them might find themselves owing money to the IRS this year.
There is a change in the TCJA that is actually quite positive for most taxpayers: a nearly doubled standard deduction. Under the new rules, single tax filers can now deduct $12,000, heads of households a total of $18,000, and married couples filing a joint return have a maximum of $24,000.
Before the TCJA was implemented, around 33% of all California tax deductions were itemized. But under the new rules, for most people it simply isn’t worth it to itemize.
San Diego family example:
Let’s take a San Diego family, living in a comfortable detached home with an assessed value of $1,000,000. This family is doing pretty well financially and has a household income of around $150,000. As of 2019, this family would be responsible for $7,810 in property taxes, and around $7,638 in state income tax.
- Under previous rules, it would make sense for this family to itemize, since their SALT bill on their property and income taxes would total $15,448. By doing so, they would be paying $2,748 less than the standard tax deduction available for couples at the time.
- But under current rules, this family would only be able to deduct $10,000 from their SALT bill. Because this family qualifies for a $24,000 standard deduction, it doesn’t make sense for this family to itemize.
Now, let’s take another family living in a $2 million dollar home, and a $226,000 annual household income. Though by many states’ standards this family is quite wealthy, by San Diego County standards they are in the mean of the top 20% of earners. Their property taxes would be $15,620 while their state income tax would be $14,406. Their SALT bill on those two items alone would be $30,026.
In the past this family would be able to deduct all $30,026, but this year they would have to take the $24,000 available as a standard deduction, or take the $10,000 SALT itemized deduction, and find an additional $6,026 to itemize to break even with the standard deduction. For this family, it may still make sense to itemize. To find out if it makes sense to itemize your California tax deductions this year, talk to a tax professional.