As I tell my three girls, success in life must start with a plan. Now that we have one year of the Tax Cuts and Jobs Act (TCJA) under our belts and we have a better understanding of its consequences, this week let’s plan ahead into 2019 and beyond to see how the TCJA may benefit us, specifically when it comes to filing our next tax return.
One of the TCJA’s most significant changes is a massive increase to the standard deduction – almost double what it was last year. Single filers and married couples filing separately can claim a $12,000 deduction, up from $6,350 for the 2017 tax year. Married couples filing jointly can claim a $24,000 standard deduction, up from $12,700. Heads of households can claim an $18,000 standard deduction, up from $9,350.
Important to note here that taxpayers who are over 65 or who are blind are also able to deduct an additional amount: $1,600 for single taxpayers and heads of households; $1,300 for married couples filing separately; and $2,600 for married couples filing jointly.
I think that what we will see moving forward is, generally speaking, a growing number of lower-income taxpayers move towards the standard deduction, while higher-income taxpayers and those with very complicated tax situations may continue to itemize. On balance, many tax experts believe that many more folks will claim the standard deduction for their 2018 taxes compared to previous years. In fact, Intuit (the maker of the popular TurboTax software) estimates that nearly 90% of taxpayers will take the higher standard deduction instead of itemizing, up from about 70% in previous years.
However, a larger standard deduction does come with some downsides: The elimination or reduction of many exemptions and deductions we’ve grown to expect.
For example, the $4,050 personal exemption for yourself and each of your dependents has been eliminated. Historically, the deduction for State and Local Tax (SALT) was unlimited. For 2018 and beyond, SALT is limited to $10,000. For many of us, this is a significant change.
Previously, interest could be deducted on Home Equity Lines of Credit (HELOCs) and mortgages up to $1 million. Moving forward, the mortgage interest deduction on primary and secondary residences will only apply to loans less than $750,000. In the past, you could also deduct interest on HELOCs used to pay some personal expenses such as student loan debt or credit card debt. That’s also wiped out.
Other deductions that evaporated include casualty and theft losses (except those covered by a federally-declared disaster), unreimbursed employee expenses, tax preparation expenses, moving expenses, alimony payments, and employer-subsidized parking and transportation reimbursements.
Fortunately, the TCJA eases the burden on folks with significant unreimbursed medical expenses. Last year, taxpayers could deduct those medical expenses only above 10% of your adjusted gross income (AGI). This year that’s lowered that to 7.5% of your AGI.
Folks, there’s also good news for families looking to keep more of their money in 2019. The Child Tax Credit (CTC) has been doubled from $1,000 to $2,000 per child. What’s more, the phase-out for the CTC has been raised dramatically – from $75,000 for single filers and $110,000 for married couples filing jointly to $200,000 and $400,000, respectively.
Generally speaking, the CTC functions as a credit against what the taxpayer owes in taxes. Sometimes, however, it can translate into an actual tax refund or tax rebate.
For a small percentage of families in the United States, the Child Tax Credit will be larger than their tax liability. In this case, part of the unused part of the Child Tax Credit can be refundable as an additional Child Tax Credit.
With the new tax bill, up to $1,400 of the $2,000 per-child credit is refundable. What this means is, you can receive up to $1,400 of the child tax credit back even if you don’t wind up owing any taxes. Now that’s a pretty good deal!
With the new tax law in place, advanced tax planning techniques become even more critical when developing a sound retirement system. As we have discussed, with the almost doubling of the standard deduction, many deductions, such as the charitable deductions could disappear.
Not all is lost, since the TCJA provides the ability to implement an advanced tax planning technique called “bundling.” Bundling allows us to combine several years’ worth of deductible expenses into a single year allowing us to possibly itemized deductions in one year and take the standard deduction the next. The time to begin planning and implementing this technique is now, so make sure you speak to your retirement specialist to better understand bundling and to see if it is appropriate for you.
The TCJA changed tax withholding tables in 2018. I suggest using the IRS online withholding calculator to help make sure your W-4 is set up appropriately. The start of 2019 is a perfect opportunity to give yourself a “paycheck checkup” to make sure you’re paying the right amount of tax.
Upon completion of a paycheck checkup, if changes are needed adjust your withholding by filing a new W-4 with your employer. By ensuring you have the appropriate amount of tax withheld, you can put your earnings to their best use throughout the year. Folks, a big tax return isn’t a windfall: It’s getting back money that was already yours, without the benefit of the compound interest that money could have earned for you.
Lastly, while it’s best to plan tax mitigation strategies in advance, it’s still not too late to make changes which can help to reduce your tax liability for last year. After all, you have until April 15, 2019 to completely fund retirement plan accounts for 2018. Making deductible contributions may lower your tax bill, and the contributions you make will compound tax-deferred. Additionally, Uncle Sam has also increased some retirement fund contribution limits for the first time in six years, to help us put away more for our golden years.
The French writer Antoine de Saint Exupéry once wrote, “A goal without a plan is just a wish.” For 2019, stop wishing and let’s start some planning. With the myriad changes to the income tax law made by the TCJA now in full effect, it’s vital for all of us to start 2019 by making appropriate choices when it comes to building out a sound retirement system. Whatever your goals are for 2019, incorporating Advanced Tax Planning techniques to help reduce tax liability, coupled with the right investment plan that manages downside risk to help avoid catastrophic losses may help to provide you the foundation for financial success.
Be vigilant and stay alert, because you deserve more in 2019 and beyond.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
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