As we enter into the tax
planning stage of the year, the focus shifts to helping clients understand the
impact of the Tax Cuts and Jobs Act and optimize their tax positions. That is
no small task, given that there are over 130 new tax provisions.
No. 5 — Itemized deductions
versus the standard deduction
The Tax Cuts and Jobs Act
roughly doubles the standard deduction. This means that for 2018, joint filers
can enjoy a standard deduction of $24,000. However, the new law suspends
personal exemption deductions and eliminates or limits many of the itemized
deductions. For example, the state and local tax deduction is now capped at
$10,000 per year, or $5,000 for a married taxpayer filing separately. Also, the
Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions
subject to the 2 percent floor (like tax preparation fees and employee business
expenses) and limits the home mortgage interest deduction to home acquisition
debt of up to $750,000, or $375,000 for a married taxpayer filing separately.
So, what does this mean for tax
payers? For those who typically claim the standard deduction, chances are their
tax bill will decrease for 2018. Although personal exemption deductions are no
longer available, a larger standard deduction, combined with lower tax rates
and an increased child tax credit, may result in less tax. Also, you may find
that clients who itemized last year won’t itemize this year, or they may be
able to itemize for state income tax purposes but not for federal. You will
need to run the numbers to assess the impact for each client. Depending on the
results, you may need to adjust your clients’ estimated quarterly tax payments
or encourage them to turn in a new Form W-4 to their employers.
No. 4 — Revisit your qualified
tuition plans
Qualified tuition plans, also
called 529 plans, are a great way to ease the financial burden of paying for
college. Before the Tax Cuts and Jobs Act, earnings in a 529 plan could be
withdrawn tax-free only when used for qualified higher education at colleges,
universities, vocational schools or other post-secondary schools. Thanks to the
Tax Cuts and Jobs Act, 529 plans can now be used to pay for tuition at an
elementary or secondary public, private or religious school, up to $10,000 per
year. If your clients are paying tuition for their children or grandchildren to
attend elementary or secondary schools, encourage them to either set up or
revisit their 529 plans. They’ll thank you for it later.
No. 3 — Watch out for home
equity debt interest
Under the Tax Cuts and Jobs Act,
home equity debt interest is no longer deductible. Or so you thought. According
to the IRS, interest paid on home equity loans and lines of credit is
deductible if the funds were used to buy or substantially improve the home that
secures the loan. In other words, it’s treated as home acquisition debt subject
to the new $750,000/$375,000 limit. This is good news for homeowners, but it
forces you to trace how the proceeds were used. If your client used the cash to
pay off credit card or other personal debts, the interest isn’t deductible,
even if the payoff occurred prior to 2018.
No. 2 — Bunch charitable contributions
The new law temporarily
increases the limit on cash contributions to public charities and certain
private foundations from 50 to 60 percent of adjusted gross income. However,
the doubling of the standard deduction and changes to key itemized deductions
will prevent some clients from itemizing in 2018 and therefore benefiting from
this increased limit. One way to combat this is to bunch or increase charitable
contributions in alternating years. Suggest that clients set up donor-advised
funds. This will allow them to claim a charitable tax deduction in the funding
year and schedule grants over the next two years or other multiyear periods.
Clients can take advantage of the deduction when they’re at a higher marginal
tax rate while actual payouts from the fund can be deferred until later. It’s a
win-win situation.
No. 1 — Maximize the qualified
business income deduction
Perhaps the hottest topic of the
Tax Cuts and Jobs Act is the new qualified business income deduction under
Section 199A. Individuals who own interests in a sole proprietorship,
partnership, LLC, or S corporation may be able to deduct up to 20 percent of
their qualified business income. However, the deduction is subject to various
rules and limitations.
Although the final official
guidance is lacking on this new deduction, there are some planning strategies
that can be considered now. For example, clients can adjust their business’s
W-2 wages to maximize the deduction. Also, it may be beneficial for clients to
convert their independent contractors to employees where possible, but make
sure the benefit of the deduction outweighs the increased payroll tax burden
and cost of providing employee benefits. Other planning strategies include
investing in short-lived depreciable assets, restructuring the business,
leasing and selling property between businesses, and, yes, even getting
married.
