2 Areas Where the Tax Code Got More Generous

Michael Kitces is a partner and the director of wealth management for Pinnacle Advisory Group, co-founder of the XY Planning Network, and publisher of the continuing education blog for financial planners, Nerd's Eye View. You can follow him on Twitter at @MichaelKitces.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The recently enacted tax legislation makes it much less likely that many taxpayers will itemize their deductions. Joining me to discuss what's going on with deductions as well as some strategies for taxpayers to consider is Michael Kitces; he's joining me via Skype.

Michael, thank you so much for being here.

Michael Kitces: My pleasure. Thanks for having me.

Benz: I want to talk about specific strategies that people can use, but before we do that, there are a couple of deductible items where actually the tax code is getting a little more generous. One is in the realm of charitable contributions and then also medical expenses for 2017 and 2018. Let's talk about those items.

Kitces: We got a little bit of an expansion. Medical expenses for years and years were deductible to the extent they exceeded 7.5% of your income, technically your adjusted gross income on a front page of the tax return. We increased that under Affordable Care Act up to 10% threshold. The new law actually backs that down again to a 7.5% threshold for the next two years, really last year 2017 as we wrap it up and then 2018 this year. For anybody who happens to have large medical deductions you'll get a little bit more deductibility out of it.

We also made charitable deductions a little bit easier. Most people won't actually be impacted by this, but we changed the income limit, which currently, say, when you make large cash contributions to charities, you can only take a deduction for up to 50% of your income, if it's a big deduction in one year, now you can actually lift that number up to 60%. People that make big charitable contributions can get a little bit more immediate tax leverage out of it. We see this most commonly in situations where people have, say, big liquidity events: they retire, they get a big severance package, they sell a business, they have some large lump sum event in one year, and they want to get some bigger deductions to offset against it. Now we can do a little bit more with charitable deductions.