By: Melissa Cothran and Annie Duckworth
The Tax Cuts and Jobs Act of 2017 (TCJA) is the most substantial change in tax law in over 30 years. While this legislation certainly altered tax law as we know it, the notion that taxes were “cut” for every individual is simply not true. Assuming a decrease in your tax solely based on the decrease in tax rates is not a safe bet. To accurately plan for your 2018 tax liability, it is now more important than ever to consult a tax professional.
The changes are many and too voluminous to cover in one article, so we are focusing below on the most impactful changes for individuals and strategies taxpayers should consider prior to year-end to give fewer tax dollars to Uncle Sam in April 2019. Be sure to check out our two other articles regarding Section 199(A) and Qualified Opportunity Zone Credits.
The number of brackets remained the same at seven. Rates overall, however, have come down. For individuals, these lower rates are scheduled to expire in 2025 unless Congress extends them. Also notable is the top rate on long-term capital gains and qualified dividends of 20 percent and a surtax on net investment income of 3.8 percent. The chart below summarizes the Adjusted Gross Income (AGI) thresholds at which various tax rates become effective.
As taxpayer’s project 2018 income, consider acceleration of deductions or postponement of year-end bonuses and other recognition events to stay within the below thresholds where possible.
The Standard Deduction vs. Itemizing Deductions
The standard deduction now available to taxpayers increased to $12,000 for those filing single and $24,000 for those who classify as married filing joint; this is nearly doubled from 2017. While this change is positive for those who do not itemize, those who do itemize will see major changes to what is allowed as a deduction, potentially resulting in taking the standard deduction. Important to mention also is that while the standard deduction has increased, the deduction for personal exemptions historically allowed for qualified dependents is no longer available. New increased Child Tax Credits may well replace this benefit, but just as before the law change, income thresholds must be considered.
Miscellaneous itemized deductions such as tax preparation fees, investment fees, and unreimbursed employee expenses are no longer allowed. Unreimbursed mileage for those who are not self-employed will also no longer be deductible. Talk with your employer to see if any policy changes have been put into place to reimburse for expenses such as mileage because of the TCJA.
State and local taxes (including real estate and sales taxes) have been capped at a total of $10,000 per year, having a significant impact on those individuals living in states with high-income tax. When evaluating whether to pay real estate taxes in 2018 or 2019, consider if the total paid will be capped at the $10,000, resulting in a lost deduction.
Mortgage interest paid on primary and secondary residences is still a potential write-off, but the ability to deduct mortgage interest has been reduced, as the cap on acquisition indebtedness qualifying for the home mortgage interest deduction is decreased from $1 million to $750,000 ($375,000 for married filing separately). The pre-TCJA cap still applies for mortgage loans existing prior to Dec. 15, 2017, and for individuals who signed a binding contract before that date to buy a home and met certain other requirements.
Charitable deductions for those who itemize are still safe. If you give to a public charity, deductions are limited to 60 percent of your Adjusted Gross Income (AGI) for cash contributions and up to 30 percent of your AGI for contributions of long-term appreciated securities, using the fair market value of the securities on the date of the gift. Gifting stock is one of the most tax-efficient, yet surprisingly underutilized strategies. By gifting high value, low-cost securities, the deduction to the taxpayer is the FMV, and capital gains tax is avoided on the sale – win, win! For those taxpayers considering year-end donations, a Donor Advised Fund is an excellent choice. A gift is made to the fund by Dec. 31, qualifying the gift as a 2018 deduction, but the choice of charitable entity may be delayed until after year-end.
A positive change for those who itemize is the repeal of the Pease limitation, which would often limit the value of itemized deductions in years in which clients had too much taxable income. Without this reduction, clients may have more flexibility as it relates to the timing of the remaining itemized deductions.
Oldies, But Goodies
While the TCJA made changes to many of our “Go To” Planning ideas, there are still some strategies that remain and should continue to be considered in your Year-End Planning.
Required Minimum Distributions (RMD)
The ability to satisfy the annual Required Minimum Distribution (RMD) by directing up to $100,000 to public charities is alive and well and may be the most efficient way to gift for those who will now be taking the standard deduction rather than itemizing. Typically, dollars withdrawn for an RMD are taxed at ordinary tax rates. The charity will then receive these after-tax dollars, and the taxpayer will receive a charitable deduction. Recalling that the TCJA made substantial changes to itemized deductions, many taxpayers will now be unable to deduct this charitable donation. Directing the RMD to the charity directly prevents the ordinary income tax on the distribution, as well as satisfies the charitable intent.
Health Savings Accounts
If you have a Health Savings Account, it is important to maximize your 2018 contributions. Contribution limits are $3,450 for an individual, $6,850 for a family, and a catchup contribution of $1,000 is allowed for those 55 or older. Remember that unlike Flexible Spending Accounts, unused HSA funds roll to the next year, allowing you to save for medical expenses that you may incur in the future. These contributions are an above the line deduction, creating a higher tax benefit than would be garnered if you instead met the 7.5 percent AGI threshold for 2018 or the 10 percent AGI threshold for 2019 to take your medical expenses on Schedule A.
Annual, Medical and Educational gifts are still in play for 2018 and can accomplish the transfer of assets over time. The 2018 annual exclusion is $15,000 and can be given to an unlimited number of recipients. Spouses can double this and gift jointly up to $30,000 per recipient. In addition to these annual gifts, you can make certain medical and educational gifts to an unlimited number of recipients. The catch and crucial point with these gifts is that the funds must be given directly to the institution to be excluded from gift tax and annual exclusions.
Yes, it’s true that TCJA changed the tax groundwork as we’ve known it for the last 30 years, but with proper planning, there are still ample techniques and strategies to keep more dollars in your pocket. Take advantage of tax planning opportunities available under the new law by starting or continuing conversations with your tax advisor at LBMC. We are here to make planning as efficient and effective as possible; call LBMC today and let us help you make the most out of the TCJA changes.
The LBMC Wealth Advisors Team wishes you and your family a very Merry Christmas and a prosperous New Year!
- The Tax Cuts and Jobs Act of 2017 changed the tax law landscape as we know it.
- Decreases in Tax Rates do not equate to an overall decreased tax.
- Despite the changes, many planning opportunities remain.
- If you haven’t yet, start your year-end tax planning conversation now.