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Jan 11, 201811:57 AMOpen Mic

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Useful tax reform tips

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The holidays have come and gone, and those of us in the tax arena have spent as much time digesting the new tax law as we have our tasty leftovers. Much has been written summarizing this and that about the new tax law. Many articles point out some new way that a certain taxpayer in a certain situation will be worse off. Most of those ignore the fact that taxpayers can adjust their behavior to match their situation to the new rules to get to the lowest tax bill possible. If you move a bridge, people don’t just keep driving off the edge of a cliff — they find a new bridge. With this post, I aim to provide a few key concepts that you should keep in mind as you venture toward that new bridge.

Go big, then stay home: With respect to charitable donations, the game has changed. The federal standard deduction (for a married couple filing jointly) is now $24,000, and the deduction for state taxes is limited to $10,000. Therefore, if you can’t come up with more than $14,000 of mortgage interest and charity in a given year, you receive no incremental tax benefit by supporting your favorite cause. Thus arises the “go big” strategy — give as much as you can in year one by giving two or more years worth of support, and get yourself above the $24,000 threshold. Then in year two, stay home and hold back on larger donations, and take advantage of the higher standard deduction. Another option is to utilize a donor-advised fund, which Google can tell you plenty about. The short gist of it is that you can fund this account with a large chunk of cash or securities and get an immediate deduction. Then over a number of years, disburse those funds to charities on your own schedule.

Get low: Overall, our tax rates have dropped. How much depends on which bracket you’re in, but this is an important piece to keep in mind when you’re reading about lost deductions elsewhere. Yes, you are “losing” those deductions, but the net result is that your taxable income will be taxed at lower rates.

Get that AMT outta here: The alternative minimum tax (AMT) has been swept under the rug for most of us. The new law substantially increases the thresholds that previously caused many to be unexpectedly subject to the alternative minimum tax. Of course, the law also concurrently removes many deductions that used to be allowed for regular tax but not AMT. In any case, it will be relieving for most taxpayers to not have to think about their tax bill under two separate computations.

Mortgages: The mortgage interest deduction is changing. It used to be that you could deduct interest on up to $1 million of debt. Now, that limit has been reduced to $750,000 of debt. Also, it has to be acquisition indebtedness, and one new bogey is that you can no longer deduct the interest on home equity loans. This change, combined with the increased standard deduction, may begin to shift the narrative on mortgage debt. It used to be that it was considered “good” debt because, hey, at least you could deduct the interest. Now, for many, it’s just plain old debt, just waiting to be paid off.

(Continued)

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