Top Five Tax Cuts and Jobs Act Tax Planning Opportunities for Individuals in 2018

Top Five TCJA Tax Planning Opportunities for Individuals, SFS Tax, SFS Tax Accounting, Planning, Planner

Since folks have not filed a 2018 tax return, the new tax law passed late last year is largely a mystery to many. Here are the top five opportunities that you may be unaware of. Take advantage of these insights to maximize your refund and minimize your tax debt.

#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 deductions are now capped at $10,000 per year or $5,000 for a married taxpayer filing separately.

Also, the Tax Cuts and Jobs Act (TCJA) temporarily eliminates miscellaneous itemized deductions subject to the 2 percent 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 you?

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.

You may find that those that itemized last year won’t itemize this year, or they may be able to itemize for their state income tax purposes but not for federal.

You will need to run the numbers to assess the impact.

Depending on the results, you may need to adjust your estimated quarterly tax payments or 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Before the TCJA, earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools.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 you are paying tuition for your children or grandchildren to attend primary or secondary schools, you may want to set up or revisit their 529 plans.

#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 are deductible if the funds were used to buy or substantially improve the home that secured 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 you used the cash to pay off a credit card or other personal debts, the interest isn’t deductible, even if the payoff occurred before 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 percent of adjusted gross income.

However, the doubling of the standard deduction and changes to key itemized deductions will prevent you 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.

You may want to set up donor-advised funds, as this will allow you to claim a charitable tax deduction in the funding year and schedule grants over the next two years or other multiyear periods. You 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 newly 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 percent of their qualified business income.

However, the deduction is subject to various rules and limitations.

Although the final official guidance is lacking on this new deduction, some planning strategies can be considered now.

For example, you can adjust their business’s W-2 wages to maximize the deduction.

Also, it may be beneficial for you to convert your 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 companies, and, yes, even getting married.

You should consult an Enrolled Agent to make sure that you are taking advantage of everything you can… or to make sure that you do not get caught with your pants down.

If you ask in November, December or – heaven forbid – in January, it may be too late (in January, it really will be too late).

Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as an Enrolled Agent and a Certified Tax Resolution Specialist.
Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.

The book is available in paperback and ebook on
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