Tax reform has significantly changed tax planning for almost every taxpayer. Specifically, homeowners and investors have some noteworthy changes to be aware of. While many taxpayers will see a decrease in the amount of taxes they owe, you shouldn’t assume this will be the case for you. We highly recommend you talk to your C.P.A. or tax consultant now to prepare for the changes ahead.
One of the selling points of the Tax Cuts and Jobs Act, which politicians frequently like to make, is the standard deduction has been nearly doubled to $12,000 for single fillers and $24,000 for married filing jointly. However, to provide for this new benefit, several itemized deductions were eliminated, as were personal exemptions.
For investors, one of the most valuable eliminated deductions is miscellaneous itemized deductions including things like investment and advisory fees, as well as tax preparation fees. In the past, investors were able to deduct investment management fees above 2% of their adjusted gross income. In order to combat this, you can begin having fees associated with retirement accounts paid directly from these accounts. Therefore, the fees are being paid with pre-tax dollars.
Another meaningful tax benefit, state and local taxes, has been limited to $10,000 and are now combined with your property tax. This will likely affect those in states with high state income taxes or those who have significant property values.
Investors need to watch out for schemes to make up for these lost deductions. One legitimate way to create a deduction is by making a charitable contribution. You may consider bunching charitable donations that you would normally have given over a course of two or three years and donate a greater amount every two or three years to get your itemized deductions over the new limit. You’ll want to be sure you are donating to a legitimate charity. Some states have created a “general fund” charity in lieu of paying state income tax in an effort to help those who have lost valuable itemized deductions. However, the IRS has yet to give their blessing on this workaround.
While mortgage interest is still deductible, some taxpayers may not have enough to make it worth itemizing. If that is the case, you may want to have your C.P.A. and financial adviser run projections to see if paying off your mortgage is a cost-effective option. Normally, we believe that if you have extra money, you can earn a higher rate of return in the market than you’d save on interest by prepaying your mortgage. However, if the itemized deduction is irrelevant because you are eligible for a higher standard deduction, some investors may consider this a valid option. Your adviser and C.P.A. will have to look at your individual situation and cash flow to determine if this would work for you.
The good news is that for many families, the expanded child tax credit combined with the lower marginal tax rates can help make up for the loss of personal exemptions. Unlike a deduction, a tax credit is subtracted from the tax liability of the individual(s) filing the tax return. For example, if your tax liability is $38,000 and you have two children, you’ll be able to deduct $4,000 from your tax bill, bringing your liability down to $34,000.
Each tax situation is different, so it is extremely important to talk with your tax consultant sooner than later as you still have time to make changes if necessary. If you have questions regarding your tax situation, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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