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Taxes - Itemized Deductions

For individuals whose itemized deductions could exceed the standard deduction, it can be important to model itemizable expenses in this section, particularly for the detailed tax calculations in Prosper reports. Different itemized deductions have different allowable amounts and thresholds.

Itemized deductions will be included as part of personal expenses. In Aspire retirement projections, this means the expenses will be ignored pre-retirement, assuming the clients have enough income to cover them. In retirement itemized deductions will be accounted for with all other expenses, resulting in potential withdrawals from assets to cover the expenses.

Before modeling itemized deductions note that the following items will be automatically reported as itemized deductions:

Residential mortgage interest
Other liabilities marked as interest tax deductible
Medical, Medicare Part B, and LTC insurance premiums
State Taxes
Charitable distributions modeled in Ret. Plan Strategies using the Qualified Charitable Distributions section that do not legally qualify.

Table

The table shows the each of the main categories of itemized deductions. Select an item from the table to enter how much the clients are paying into each itemizable expense. When entering amounts, enter the total gross amount paid. The program will calculate the portion that can be itemized.

NOTE: State taxes are calculated based on the state selected in the File Status / Options tab. Total state taxes are included with property and other taxes. The total itemizable of combined state, property, and other taxes cannot exceed $10,000 per the Tax Cuts and Jobs Act (TCJA). If elected to expire, the program will no longer cap the itemizable amount once it expires after 2025. The option to sunset the TCJA is in the File Status / Options tab.

Additionally, mortgage interest is automatically calculated from the Liabilities section and assumed itemizable. Other debts have the option to have the interest itemized by checking the box "Interest Tax Deductible".

Medical Expenses: Enter non-insurance related medical expenses that are itemizable here. The amounts entered here qualify for tax free distributions from Health Savings Accounts (HSAs). Insurance information for medical insurance, Long-Term Care, and Medicare can be modeled in the Miscellaneous Insurance tab of the Insurance section. Any medical expenses not covered by an HSA will go towards itemized deductions in tax calculations. Any medical expenses exceeding 7.5% of AGI is itemizable.

Property Tax: This is property taxes paid on residential properties. Do not include property taxes on rental properties, as the taxes on rentals is handled different, and the program has inputs for such expenses for Rental Real Estate assets. As part of the Tax Cuts and Jobs Act (TCJA), the total itemizable amounts for combined state, property, and other taxes cannot exceed $10,000. When choosing to allow the TCJA to expire after 2025 the program will no longer cap state, property, and other taxes. The option to sunset the TCJA is located in the File Status / Options tab.

Other Tax (Non Property / State): Any additional taxes beyond state, property, and Federal the individual(s) pay can be included here. This amount is included with state and property taxes. The total itemizable of combined state, property, and other taxes cannot exceed $10,000 per the Tax Cuts and Jobs Act (TCJA). If elected to expire, the program will no longer cap the itemizable amount once it expires after 2025. The option to sunset the TCJA is in the File Status / Options tab.

Other Deductible Interest: Use this field to model any itemizable interest payments that are not a part of other debts that have the box "Interest Tax Deductible" checked when modeled in the Liabilities section. Do not include mortgage interest or interest paid on debts modeled in Liabilities with the "Interest Tax Deductible" checked. The program does not cap this type of deductible interest.

Charitable Contributions: Enter the total charitable contributions made. For 2021 the program will cap itemizable contributions to 100% of AGI. Afterwards, the limit is reduced to 60% of AGI.

TIP: Are clients making Qualified Charitable Distributions (QCDs) from their retirement accounts? If so, exclude amount from the Charitable Contributions field here. Instead, model the QCD amount in Other Expenses as a 100% tax deductible expense. If they are covering their QCDs with RMDs, or if they are withdrawing from retirement accounts already for standard spending, no additional steps are required. If not, then a scheduled withdrawal must be modeled in the Assets section for the total QCD amount from a tax-deferred retirement account. Withdrawals can be modeled in the Future Changes table as a negative monthly dollar amount.

Miscellaneous: As part of the Tax Cuts and Jobs Act, no miscellaneous expenses will be itemized unless the act expires after 2025. If electing to sunset the TCJA miscellaneous expenses will begin itemized after 2025. The program reduces the miscellaneous expenses by 2% of AGI to calculated the itemizable amount. The option to sunset the TCJA is located in the File Status / Options tab.

Inputs

Select an item from the table to expand the inputs to enter information for a type of itemized deduction. The top fields can be used to quickly enter the itemized deductions before and during retirement. The amounts can be entered as a percent of gross income and/or a specific annual amount. Enter the gross amount paid for all items rather than the exact amounts being itemized. The program totals the amounts paid into an itemizable expense and automatically caps what is actually itemized based on current law.

% of Gross: Enter the percentage of gross income the clients are expected to pay into the itemized deduction type. This can be useful for items like charitable contributions where an individual may want to simply maximize how much they pay in order to deduct as much as possible.

NOTE: For property taxes, this is entered as a percentage of property value. This way users can easily enter property taxes as a proportion of their residences modeled in the Assets section, to correspond with many localities that calculate property taxes based off property values.

Annual Amount: Use these fields to enter the gross amount paid into the itemizable expense in today's dollars.

% Increase: Enter the inflation rate for the itemized expense in these fields. This amount will be applied to the Annual Amount values, but not the % of Gross fields.

Future Changes

Use the Future Changes table to modify the amounts paid into an itemizable expense at a specified age. Click the Add New Entry button to create a future change entry. The age entered is based off individual 1's age. A future change is assumed to continue forever until another change overrides it. For temporary increases be sure to add a final entry to resume standard behavior.

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