On December 22, 2017, TCJA of 2017, arguably the most sweeping tax legislation since the Tax Reform Act of 1986, was signed into law. Here are some highlights from the reform that affect individual taxpayers:
- Potential 20% deduction for taxpayers with qualified business income from partnerships, S-corporations, or sole proprietorships
- Deduction limitation of state, local, and real estate taxes to $10,000
- Increase in standard deduction ($24K for MFJ, $18K for HOH, $12K for all others)
- Elimination of personal exemptions
- Increase in child tax credit to $2,000 ($1,400 is refundable) – threshold at which the credit begins to phase out is increase to $400K for MFJ and $200K for other taxpayers
- Suspension of miscellaneous 2% itemized deductions (e.g. unreimbursed employee business expenses, investment expenses, tax preparation fees, etc.)
- Home equity loan interest deduction no longer deductible (unless it is secured by your principal residence)
- Income-based percentage limit for charitable contributions increased to 60% from 50%
- Net operating losses for years beginning after 2017 cannot reduce taxable income by more than 80%
Here are some other changes and/or ideas that might potentially affect your year-end tax planning strategies:
529 Plans
- 529 plans now allow for up to $10,000 in annual, tax-free distributions for tuition of public, private, or religious elementary schools
- You can also rollover up to $15,000 of your 529 plan into your ABLE account
Retirement Plans
- If your employer offers a retirement plan (e.g. 401K), consider maximizing your pre-tax contributions to reduce your taxable income
- If your employer does not have a retirement plan, depending on your income levels you can consider contributing to a traditional IRA, Roth IRA, or possibly even performing a Roth conversion (Roth conversions must be done by year-end)
Qualified Charitable Distribution
- For those who are required to take minimum distributions, it is possible to contribute up to $100,000 directly from your retirement to an eligible charity of your choice
- This withdrawal does count towards your required minimum distribution and you are not required to pay tax on it but you also do NOT get the charitable deduction
Qualified Charitable Contributions
- With the new law nearly doubling the standard deduction, there will be a significant reduction in the number of households that will need to itemize their taxes. With some tax planning, you may be able to surpass the standard deduction and provide additional tax benefit.
A few ways to accomplish this:
- Bunching your contributions every other year
- Setting up a donor advised fund to facilitate larger deductions by grouping them into a single tax year but then get to spread your grants to charities over current and successive years
- Gifting appreciated securities with low cost basis to (1) get a deduction for the FMV of your gift and (2) avoid capital gains tax on what you would’ve paid had you sold it
With the aforementioned changes and ideas, and November being just around the corner, this would be a great time to review your tax situation. Also, take this opportunity to double check your withholdings to (1) avoid underpayment penalties and (2) obtain a better understanding of what your tax picture will look like rather than getting blindsided on April 15th.
If you have a tax advisor, pick up the phone and give them a call because they will be able to help navigate you through all of this. If you would like our help, do not hesitate to contact us at 217.351.2000.
