Published by Taylor Financial Group
Most of us have been watching the twists and turns of the recently signed Tax Act with baited breath, wondering how the laws will affect us. And, most of the waiting is done. However, although the first round of ink is dry, we still need to understand how the new laws will actually impact us. According to the Tax Policy Center, the good news is that four out of every five taxpayers can expect a reduction. However, for many lower income taxpayers, that tax cut will be so little it may hardly even be noticed. Moreover, if you live in a high tax state or you rely heavily on deductions (hello New Jersey!!), you are likely to see a tax increase. The bottom line – every taxpayer will need to assess their individual situation. In the meantime, here are some initial thoughts on a few key areas.
State and Local Taxes (SALT)
Recently, the so-called SALT deduction has had a lot of attention in the news, as many blue states are resisting the deduction and choosing to fight back. The $ 10,000 SALT limitation will be most acutely felt in the six states that account for half of the value of these deductions: California, Illinois, Maryland, Massachusetts, New Jersey and New York, according to the Tax Foundation. California’s State Senate president pro tempore, Kevin de León, is outraged and has pointed out that, today, the average California taxpayer takes a $22,000 deduction, and the GOP measure would “cap it at $10,000, meaning Californians will be double-taxed,” which is what other similar states are facing.
Basically, these states will be affected in two main ways. The reduced SALT deduction will cap the amount of state, local, property and sales taxes that taxpayers can deduct from their federal income tax calculations to a maximum of $ 10,000. So, if you own a home in one of the states mentioned above, you may want to consider revising your financial plan to account for how this may affect your cash flow and the value of your home. Indeed, if one of these states is your primary residence, you may even want to consider relocating to a more tax-friendly state, depending on your situation. Before the new tax bill, the deduction was unlimited.
If you are one of the many people that will benefit from taking the standard deduction, you may want to consider bunching deductions, so that you take the standard deduction one year and itemize the next. By employing this tried and true strategy, you will be able to take the most advantage of some of those lost itemized deductions, by perhaps claiming the standard deduction in one year, and then paying your real estate taxes, mortgage payment and funding your charitable contributions the next year, which will enable you to take the full advantage of your available deductions.
Good Bye to Miscellaneous Itemized Deductions
The elimination of miscellaneous itemized deductions for tax preparation fees, investment fees, moving expenses, and employee expenses means you should reconsider how and when you pay expenses. Confirm that your employer is unable to absorb those business or moving expenses that you may currently be paying out of pocket, or perhaps consider cutting back in those areas. Also, if you deduct your investment advisory fees, then consider mutual funds or ETF’s or consider using your IRA to pay investment fees going forward, which allow you to use pre-tax funds for these payments.
Donating to Charity
Charitable contributions are another area that is already getting impacted by the tax law changes. Due to the expansion of the standard deduction to $24,000 per couple, it is likely that less people will itemize deductions going forward. Indeed, about 30% of taxpayers currently itemize, and it is estimated that fewer than 10% will itemize in the future as a result of the new Tax Act, particularly if they live in states with little to no income or real estate taxes.
If you take the standard deduction, rather than itemizing, you cannot take deductions for your charitable contributions from your income taxes. What you can do, however, is open a donor advised fund and prefund it with several years of donations. Once you fund the account, you can then take one large up-front deduction, potentially itemize that year on your tax return, and then spread the distributions to the charities in future years when you are using the standard deduction. Essentially, it allows you to separate the act of donating from the actual year of deduction, which is a newish concept, but may make sense under the new law.
And, speaking of charitable contributions, while you may have a tendency to write checks to charity, more and more we want to encourage you to contribute appreciated securities to charities, particularly after the recent stock market run up, and as you may be looking to rebalance your portfolio.
Although the Tax Act was publicized as a way to simplify taxes, it will be anything but. Feel free to reach out to us with any questions.
CNN Money, Making Sense of the New Cap on State Tax Deductions, December 20, 2017
Politico, Blue State Governors Promise to Fight Federal Tax Overhaul, December 34, 2017
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
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