(Note: This is an abridged version of tax guidance sent to my clients).
While everyone has distinct tax issues, it’s helpful to understand the key changes, challenges and opportunities associated with tax reform. The most significant changes involve standard deductions and personal exemptions. The standard deduction has been doubled for most taxpayers, while the personal exemption has been eliminated. In response, far more people are expected to take the standard deduction than before. The key takeaway: if you have typically itemized your tax deductions, you may end up paying more in taxes this year, as items such as state-and-local-tax write-offs now quickly bump against new limits in place.
Offsetting this, tax brackets have been simplified and tax rates have been slightly reduced (again only until 2026). Still, most New Yorkers are expected to pay more in taxes in 2018 (compared to 2017).
If you have a series of potentially itemizable tax deductions that come close to the $24,000 standard deduction figure, consider “bunching.” This is the pursuit of certain expenses grouped together once every few years, such as charitable giving. For example, if you give around $6,000 to charity each year, you may want to instead giving $18,000 every third year, at which time you’ll pair it with other expenses that help justify the use of the itemized deduction. (on a related note, donating stocks that have sharply appreciated in value is one of the most tax-savvy moves you can make, as it removes a potential tax landmine from your portfolio.
Pre-paying two years’ worth of mortgage payments, or making all of your business-related computer purchases within one year are other examples of bunching.
Other tax issues to note:
You’ll also find that there are now fewer items you can itemize, compared to years past. Tax prep fees, investment fees, moving expenses, unreimbursed employee expenses are some of the items that have been removed from the list of deductible expenses.
If you operate certain in certain fields, or in certain kinds of businesses (known as pass-through businesses) you may be eligible for a major new tax deduction, known as the qualified business income (QBI) income deduction. This also applies to freelancers. Note that you may be eligible for this major new deduction, even if you take the standard deduction. Unfortunately, doctors, lawyers, engineers or accountants are among the professions that are ineligible for the QBI.
If you plan to transfer funds from a regular IRA into a Roth IRA, double-check that the timing of the move makes sense. In the past, you could change your mind down the road and put the funds back into a regular IRA. You can no longer do that. (Still, building up balances in a Roth IRA is one the wisest moves you can make—if you are at any juncture where your income temporarily (or permanently) dips, and you are not yet 70 years old). And when you consider that tax rates will move higher after 2025, any moves to transfer funds from a current IRA into a Roth IRA may make ample sense in the interim period.
Also the “529” education plans have been given even more favorable tax treatment than in the past. They still qualify for college, but now also qualify for K-12 schooling. This is a smart tax break that too few taxpayers take advantage of.
There are also key changes related to divorce. Alimony is no longer deductible by the payor and is no longer determined as taxable income for the recipient. (Divorce agreements in place before 2019 are “grandfathered in” at the old tax approach.
Interest on home equity loans is no longer deductible, unless the borrowed funds are specifically applied to a home improvement project. (Just borrowing from a credit line for general funding needs is no longer deductible).
Lastly, the child tax credit had been phased out for people with incomes exceeding $110,000. That ceiling has been raised to $400,000.