February 14, 2018

We love chocolate. We also love saving taxes for our clients. Hard to believe- we’re already 45 days into 2018, dealing with a very different tax structure. We’ve been working on 2018 tax planning for our clients and wanted to share some early observations with you. Our twin goals: eliminate surprises and identify tax strategies/advantages to save money.

First, a review of the major changes in personal income taxes for 2018:

  • Standard deductions are increased (to $24,000 for couples and $12,000 for singles).
  • Exemptions are eliminated.
  • State and local tax deductions are capped at $10,000 total.
  • Interest on home equity loans is no longer deductible and mortgage interest is also reduced.
  • Miscellaneous deductions are no longer allowed.
  • Tax rates have been lowered.
  • Alternative minimum tax will likely affect fewer taxpayers.
  • Self-employed taxpayers may get a 20% reduction for small businesses, partnerships and S Corps “pass-through income.”
  • Section 529 Plan distributions have been expanded to include K-12, though capped at $10,000 per year.
  • Corporate tax rate decreased from 35% to 21%.

Second, a quick recap of what we have seen on the 2018 income tax projections we’ve completed so far for a dozen or so of our clients:

  • Except for certain anomalies, such as large families, most taxpayers will be paying less tax than 2017. Larger income generally means greater tax savings. And, business owners with pass-through income will get the biggest tax benefits.
  • New, lower withholding tables have been released.
  • More taxpayers will be using the standard deduction.

Third, a summary of some key new/enhanced tax planning strategies/advantages that may help:

1. Expanded use of 529s. We think 529s are a great educational funding planning tool. As long as the distributions are for qualified expenses, there is no income tax on the appreciation of contributed funds. Furthermore, contributions are tax deductible, within certain limits, for both IL and SC taxpayers and both states offer quality investment options. Contributions can be made in installments or lump-sum.

2. Bunching of deductions. With itemized deductions being reduced, more taxpayers will use the standard deduction. A decision to use the standard deduction or itemize can be made each year. If your itemized deductions typically are less than the standard deduction, you could consider bunching deductions, particularly charitable contributions in one year, so that you could alternate between itemized and standard deduction from one year to the next. The use of Donor Advised Funds can help accomplish this.

3. Using the Qualified Charitable Deduction (“QCD”) for all or most of your Required Minimum Distribution (“RMD”) from your IRA. Once you reach 70 ½, required minimum distributions need to be made annually from your IRA accounts. Instead of simply taking the distribution and paying income tax on it, you can instead direct money to a charity and not pay tax on that part. Hence, a married couple could get the $24,000 standard deduction, plus reduce their taxable income by making QCDs. The maximum annual amount of QCDs is $100,000. If the total QCDs are less than the RMD, then you will pay tax on the difference.

4. Paying investment management fees in part from retirement accounts. Most CPAs have been deducting investment management fees as allowable miscellaneous expenses for years. Some only deducted amounts paid by taxable accounts. Some deducted the full amount, whether paid by taxable accounts or retirement accounts. Now, in 2018, investment management fees will not be deductible at all. We believe it is best to have fees for retirement plan funds paid by retirement funds and fees for taxable accounts paid for by taxable accounts. Pre-tax money in retirement accounts will be taxed someday, typically when RMDs start. Taxable accounts represent money that has already been taxed. And, paying for taxable account investment management from a retirement account would be considered a taxable distribution for which a 1099-R would be issued. Best to split it up.

5. If you are a business owner, meet with your CPA early and often. In order to give small business owners a similar tax break to the new corporate tax rate of 21%, the 2018 tax reform provided a deduction of up to 20% for pass-through entities on “qualified business income.” There are three important tests however. Certain specified businesses are excluded. Limitations may be imposed due to wages and capital amounts. And, lastly, if individual income exceeds certain limits, no deduction is allowed. CPAs are still waiting for clarification on a number of very important items associated with the 20% deduction. Regardless, keep pestering your CPA until she or he helps you put together a plan to take advantage of this huge potential tax savings if it applies to you.

Happy Valentine’s Day. We hope you enjoyed some tax savings ideas. We also hope your loved ones bring you chocolates as well. Love those Daily Doubles!!