As we enter into the tax planning stage of the year, the focus shifts to helping clients understand the impact of the Tax Cuts and Jobs Act (TCJA) and optimize their tax positions. That is no small task, given that there are over 130 new tax provisions.
Here are the top five TCJA tax planning opportunities for individuals in 2018. (Want to watch the video instead? Click here or get your TCJA Toolkit.)
#5 — Itemized deductions versus the standard deduction.
The Tax Cuts and Jobs Act roughly doubles the standard deduction. This means that for 2018, joint filers can enjoy a standard deduction of $24,000. However, the new law suspends personal exemption deductions and eliminates or limits many of the itemized deductions. For example, the state and local tax deduction is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. Also, the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2% floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.
So, what does this mean for your clients? For those who typically claim the standard deduction, chances are their tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, may result in less tax. Also, you may find that clients who itemized last year won’t itemize this year, or they may be able to itemize for state income tax purposes but not for federal. You will need to run the numbers to assess the impact for each client. Depending on the results, you may need to adjust your clients’ estimated quarterly tax payments or encourage them to turn in a new Form W-4 to their employers.
#4 — Revisit your qualified tuition plans.
Qualified tuition plans, also called 529 plans, are a great way to ease the financial burden of paying for college. Before the Tax Cuts and Jobs Act, earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools, or other post-secondary schools. Thanks to the Tax Cuts and Jobs Act, 529 plans can now be used to pay for tuition at an elementary or secondary public, private, or religious school, up to $10,000 per year. If your clients are paying tuition for their children or grandchildren to attend elementary or secondary schools, encourage them to either set up or revisit their 529 plans. They’ll thank you for it later.
#3 — Watch out for home equity debt interest.
Under the Tax Cuts and Jobs Act, home equity debt interest is no longer deductible. Or so you thought. According to the IRS, interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. In other words, it’s treated as home acquisition debt subject to the new $750,000/$375,000 limit. This is good news for homeowners, but it forces you to trace how the proceeds were used. If your client used the cash to pay off credit card or other personal debts, the interest isn’t deductible, even if the payoff occurred prior to 2018.
#2 — Bunch charitable contributions.
The new law temporarily increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of adjusted gross income. However, the doubling of the standard deduction and changes to key itemized deductions will prevent some clients from itemizing in 2018 and therefore benefiting from this increased limit. One way to combat this is to bunch or increase charitable contributions in alternating years. Suggest that clients set up donor-advised funds. This will allow them to claim a charitable tax deduction in the funding year and schedule grants over the next two years or other multiyear periods. Clients can take advantage of the deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It’s a win-win situation.
#1 — Maximize the qualified business income deduction.
Perhaps the hottest topic of the Tax Cuts and Jobs Act is the new qualified business income deduction under Section 199A. Individuals who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. However, the deduction is subject to various rules and limitations.
Although official guidance is lacking on this new deduction, there are some planning strategies that can be considered now. For example, clients can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for clients to convert their independent contractors to employees where possible, but make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies include investing in short-lived depreciable assets, restructuring the business, leasing and selling property between businesses, and, yes, even getting married.