Useful tax reform tips
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.
Another brick in the wall: For those of us saving for our kids’ education, by far the best vehicle to use (§529 plans) just got better. These plans can now be used to fund primary and secondary school expenses. This means that if your kids are or will be in private school or are homeschooled, you should start funding a §529 plan sooner and expect to continue funding it longer throughout their childhood. As a quick reminder, these plans are similar to Roth IRAs — no federal deduction for contributing (many states allow a deduction up to a certain amount) and then the earnings in the account are not taxed and you can withdraw the money tax free in the future provided it’s used for qualifying purposes.
Odds and ends: A few quick hits of some other significant changes:
- Moving expenses — No longer are these deductible, and with that change a reimbursement from an employer for moving costs is no longer tax free.
- Alimony — Alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income — for divorce agreements executed (or, in some cases, modified) after Dec. 31, 2018.
- Estate tax — The exemption has basically doubled, so a married couple can now exclude up to $22.4 million of wealth from the estate tax.
- Child tax credit — The amount of credit has doubled ($2,000 now), and the income phase-out has increased to $400,000 for those married filing jointly. Keep in mind this benefit offsets some of what was lost with the repeal of personal exemptions.
That’s just a sprinkling of what I found most interesting and also most applicable to the public at large. As every article about taxes says at some point, you should obviously talk to your tax advisor for a clearer understanding of how all these changes specifically impact you. In the interim, arm yourself with as much knowledge as you can, so that you can make decisions with the proper weight given to how your tax situation will be impacted.
Jacob Peters is a principal with SVA Certified Public Accountants. Join us for one of our seminars. For business owners, register for Trump’s Tax Reform – How Affected Will Your Business be? On February 7. For individuals, register for SVA Plumb Financial’s Investment and Tax Update on February 13.
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