Time to think ahead to the taxes you file in April, 2019.
The recently passed Tax Cuts and Jobs Act has many wondering how to alter their financial plans.
According to a poll conducted on behalf of the American Institute of CPAs, over 90 percent of people surveyed with income greater than $200,000 believe that tax planning would be somewhat or very important to their financial well-being.
People in high tax states such as Massachusetts, New York or California feel that this tax change has taken a lot of wind out of their sails with the $10,000 deduction limitation on the state and local taxes paid.
That limits deductions for many high net worth taxpayers, as their home property taxes and state income taxes are likely to be greater than the limited $10,000 deduction now allowed. These states, by the way, are feverishly trying to figure ways around the limitation. So much for tax simplification!
There are planning strategies being kicked around in high net worth circles. The first frequently discussed opportunity is to see if your small business will qualify for the 20 percent deduction against qualified business income. Essentially, this provision was intended to create parity for small business next to large conglomerates whose effective tax rate was reduced to 21 percent. Not all companies will qualify for this, so smart money is now speaking with advisors to see how to restructure to benefit from this new lower rate.
The standard deduction, which can be used instead of traditional itemized deductions such as mortgage interest and charitable contributions, is now $20,000. What that means to you is you will not receive any tax benefit from itemizing deductions if they total less than $20K.
To that end, if you are charitably inclined, you may consider timing or bunching your contributions so that there is some tax benefit. Charities may not like getting a gift every other year or less frequently, but for the tax-conscious, this may become their reality.
The deduction for home mortgage interest has been reduced. For all mortgages taken after Dec. 15, 2017, the interest will only be deductible up to $750,000. For mortgages prior to that, the old limit of $1 million still applies. A move to consider for those with excess nondeductible interest may be to accelerate your loan payoff. The new act will also limit deductibility of home equity loans or lines of credit unless the funds are used to buy or improve a home.
This tax act came upon us rather quickly. Remember this, deceased US court of Appeals Justice Learned Hand once said “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.”
Plan now while you still have the majority of the year to reap the benefits.