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It appears we will have new tax law effective January 1, 2018. This article summarizes potential tax saving strategies before year-end and highlights other key changes you will likely see in 2018. The general tax planning theme is one you’ve heard before – accelerate deductions and delay income. The tax bill generally lowers tax rates while reducing or eliminating some deductions.
Keep in mind, a number of the changes impacting individuals have sunset dates (many expire at the end of 2025). This bill does not create simplification. If anything, it will create additional uncertainty that will continue to make personalized tax planning very important.
The two most common strategies to consider prior to year-end are:
- Pay any remaining state and local estimated tax payments before December 31st. This is a traditional year-end planning topic, with even more appeal this year. Don’t overdo it – the tax bill has a provision that prevents the pre-payment of 2018 taxes.
- Prepay your 2018 property taxes. In Ohio you can pay your full 2018 property tax bill before December 31. Unfortunately, in many states this will not work. We have talked to counties in KY, SC, FL, and CO that will not accept property tax pre-payments. Any check they receive will be returned.
These strategies may not make sense for everyone. For example, clients projected to be in Alternative Minimum Tax (AMT) in 2017, may not receive a deduction for taxes regardless of when the tax payments are made.
The single biggest change in the tax bill is the increased standard deduction, which goes from $12,700 for Married Filing Joint, to $24,000 ($12,000 for Singles).This means that many tax filers may not even itemize in future years. This could simplify your filing, and create some other tax savings strategies, such as “deduction bunching” and “QCD’s” discussed more below.
Another notable change is the increased estate tax exemption to $11 million per person. Back in 2011 this was increased to $5 million per person, and the concept of portability was added, allowing a married couple to combine their exemptions without careful estate planning. The new law means a married couple can shield $22 million from estate tax, making this a non-issue for many clients. This sunsets in 2025 and will revert to the current exemption amount (adjusted for inflation) in 2026.
Here are some of the other provisions we think will impact the largest number of our clients:
- State and local income taxes plus property taxes will have a combined deduction limit of $10,000 (not indexed for inflation).
- Mortgage interest deduction will be capped at $750,000 on new mortgages, down from $1 million. This will impact homes purchased after December 15, 2017.Existing mortgages and future refinancing of these mortgages will retain the old rules.
- You can no longer deduct home equity interest. Previously you could deduct up to $100,000 if you met certain criteria.
- Tax preparation and investment advisory fees are no longer deductible. Previously they were deductible after the expense exceeded 2% of adjusted gross income if you were not in AMT.
- As noted above, the standard deduction nearly doubles to $24,000 for married couples and $12,000 for singles. Personal exemptions are eliminated.
- The Child Tax Credit will be available to more families. The phase out for married couples previously began at $110,000 but is increasing to $400,000 next year.
- The Alternative Minimum Tax (AMT) still exists, but will impact fewer people. Higher AMT exemptions combined with a cap on state and local income tax deductions will likely limit the folks nabbed by the AMT to a few unlucky filers.
- 529 plan withdrawals can be used for private elementary and secondary school expenses, up to $10,000 per student per year.
- Conversions to Roth IRAs will need to be carefully considered, because you will lose the chance to “unconvert” after the fact. The recharacterization rules will no longer apply to Roth conversions in 2018 and forward.
What strategies do we anticipate using in the future?
- The higher standard deduction will incentivize some taxpayers to stagger deductions into every other year. For example, you can make two years of charitable contributions in a single year, followed by none the next year. We expect the use of donor advised funds to continue to increase.
- The use of Qualified Charitable Distributions (QCD’s) for donations to charity from IRA’s for clients over 70.5 should become more popular. They are a slam dunk if you don’t itemize – and fewer people will be itemizing.
- The appeal of states with no income tax will become even greater.
There are numerous details in the tax bill beyond the scope of this article. Tax planning will continue to be an important part of a comprehensive wealth management strategy. Please reach out to your Foster & Motley financial planner or your tax professional to better understand what the tax bill means for you.
Wishing you a wonderful holiday and a very happy new year!
Foster & Motley
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