With tax season not quite in the rearview mirror, it seems like an opportune time to mention some takeaways from the changes brought about by the Tax Cut and Jobs Acts (TCJA) as well as revisit some tax-related topics.
While it may be too late to make any significant changes to your 2018 return, it’s the exact right time to start planning and perhaps implementing changes for your 2019 filing. The following are several steps to take in forming a tax planning strategy for 2019 and beyond.
Review your Federal withholding payments. “Tax rates dropped, so why did I owe for 2018?” If you were one of the taxpayers left wondering why you owed, or even why your refund was lower, be careful concluding balances due or refunds in 2017 versus 2018. The refund you were used to receiving in years past may have already come to you in the form of a higher paycheck resulting from a lower withholding rate. The IRS sets employer withholding tables and periodically reviewing these withholdings ensures that they are appropriate for you. While adjusting withholdings doesn’t directly reduce your tax liability, it lowers the likelihood of receiving a large tax bill in April and the potential underpayment penalties that can accompany such a bill. Federal withholding from IRA’s, pensions and Social Security also applies.
Additionally, despite a reduction in marginal tax rates, your taxable income may have increased as a result of fewer available deductions taken in past years and the elimination of exemptions. For illustration sake, suppose a couple under 65 Married Filing Jointly (MFJ) in 2017 has $20,000 in itemized deductions on their Schedule A and $8,100 in exemptions ($4,050 each). If there were no changes to their reporting in 2018, they would see their taxable income increase $4,100, even with the use of the higher $24,000 standard deduction. Effectively managing your use of the standard or itemized deductions becomes more significant, which brings us to a second tax planning area.
Create a charitable giving strategy. A strategy of “bunching” two or more years of charitable giving in the same year may enable you to itemize deductions beyond the $24,000 ($26,600 if over 65 MFJ) standard deduction some years while still taking advantage of that larger standard deduction in the years when not charitably gifting. The limit on charitable cash contributions to public charities was raised to 60% of adjusted gross income for 2018 (from 50% in 2017), further enhancing giving opportunities for some.
Another giving method mentioned previously is to “pre-fund” giving through the use of a Donor Advised Fund (DAF). Like the “bunching” method, placing several years’ worth of giving (or more) in a DAF allows you to take a deduction for that entire amount in that tax year, but then distribute the money to individual charities as you desire in subsequent years.
As a reminder, individuals over 70 1⁄2, required to make taxable withdrawals from their IRA, can lower their taxable income by designating these required distributions directly to charities. While not deducted on Schedule A, these charitable distributions are not taxable and effectively lower taxable income without the need to itemize charitable contributions.
The encouragement in all of these strategies is not to have deduction worries dictate charitable giving, but to remain generous and informed so you can simultaneously gift and use options available in the TCJA for tax reduction.
Know what changed on the Schedule A. All expenses used for itemizing deductions are compiled on a form called the Schedule A. In addition to the increased standard deduction, several key changes made to the Schedule A may dictate whether you qualify for itemizing deductions. For 2017 and 2018 taxpayers with high out of pocket medical expenses could deduct medical expenses that exceeded 7.5% of their AGI. For 2019 the number of medical expenses will again need to exceed 10% of AGI.
The deductible amount of state and local taxes (SALT) and property taxes is capped at $10,000, so taxpayers normally counting on high taxes to itemize in the past may now find it more difficult.
Additionally, miscellaneous deductions, including unreimbursed employee expense, tax preparation, and financial advising fees, have been eliminated.
No two individual tax situations are the same, which makes a good relationship with your Financial Advisor and CPA so valuable. We look forward to partnering with you in the coming year to help determine what strategies work best for your particular situation. As it’s been said, “You must pay taxes, but there’s no law that says you have to leave a tip.”