If you are like most Americans, you think about your taxes annually – when you visit your accountant at tax time (or load up TurboTax in early April), but basically, avoid thinking about them the rest of the year. For many, this is totally fine – why spend any more time than necessary on a somewhat unpleasant task?
But this year is different. The Tax Cuts and Jobs Act (TCJA), enacted in December 2017 is the most comprehensive set of changes in a generation, and the extent that it could impact you and your family hasn’t even been felt yet because we’re only in year one.
All of that being said, let’s go over several of the changes included in the new tax law.
Doubling of the Standard Deduction
The standard deduction was doubled from $6,350 → $12,700 in 2017 for Single and from $12,000 → $24,000 for Married Filing Jointly).
Key takeaway: This change will simplify taxes for many – millions fewer people will itemize deductions, because the standard deduction is greater.
Loss of Personal Exemptions
While it’s true that the standard deduction is higher, but personal exemptions are gone. This deduction would have been $4,150 per individual. All households will experience the loss of this deduction.
Key takeaway: For a household of 5 (like mine), this is a loss of $20,750 in deductions.
Limit of Combined State and Local Tax (SALT) Deduction to $10,000
Many moderate to high income earners and property tax payers in high tax states (like, you guessed it, NY) pay more than this, but their deductions will be capped.
Key takeaway: This one is going to hurt for many NY residents, Cultivating Wealth clients included.
Repeal of Home Equity Loan interest
Loans up to $100,000 may no longer be deducted unless they’re being used to substantially improve a residence.
Key takeaway: Seek advice from a financial planner before you move forward with a mortgage, second mortgage, or line of credit for home improvements.
Limit of Deductible Mortgage Interest
The new maximum deductible mortgage interest is $750,000 for homes purchased after December 15, 2017.
Key takeaway: This is down from $1 million, and many speculate it will place downward pressure on real estate prices in the Brooklyn area.
Tax Bracket Changes
The original 10% and 35% rates remain unchanged, however other tax bracket rates have declined.
Key takeaway: Most households will experience a reduction in the tax computation, although many households who lost considerable itemized deductions may still be facing a higher tax bill.
Near-Elimination of Alternative Minimum Tax (AMT)
It still exists, but thresholds are increased such that few households will pay AMT.
Key takeaway: You get to celebrate – this is one we won’t miss!
Deduction for Many Pass-Through Businesses
If you’re a pass-through business owner, you may be able to deduct up to 20% of your qualified business income (the net income that comes directly from your business). BUT, only if you meet certain qualifications related to your income and the type of business you own.
Key takeaway: This is one of the most complicated parts of the new law, so don’t hesitate to reach out if you have questions!
Do any of these sound familiar? If so, Tax Planning may be an important priority for you this year.
What is Tax Planning?
Let’s start by going over what tax planning is exactly. Tax planning is the process of analyzing your finances from a tax perspective, then putting together a plan that works to maximize your assets while reducing (or postponing) the total amount of taxes you have to pay. Depending on your situation, there are several actions you can take that help you reduce what you owe, or at the very least prevent a surprise bill at tax time.
What Can You Do?
Let’s be honest, some situations are more cut and dry than others. For example, if you’re single with a W-2 income, no dependents or taxable investments, and you make a good salary, your tax planning options may be limited. Maxing out your 401(k) to reduce your taxable income is usually a great start.
If any of the following situations apply to you, tax planning might start to become more complex :
- You had a year with “changes” – got married or divorced, sold a business or real estate, moved or started a business
- You’re a business owner, freelancer or 1099 employee
- You pay high state and local taxes (i.e. SALT)
- You own a house or have a hefty mortgage
- You’re actively investing beyond your workplace retirement plan
In these situations, you may have a little bit more wiggle room when it comes to tax strategies that you can implement before the end of the year to reduce the negative impact that tax time has on your finances. This might mean adjusting your withholdings now to avoid getting a big bill in the spring, or it could mean looking at your business expenses and making additional investments in your company to reduce the total amount of taxes you’ll owe.
Getting Started with Tax Planning
We (or your CPA) will need the following things to start your tax planning process:
- Your 2017 tax return.
- Your year-to-date profit and loss statement (for business owners).
- Your year-to-date pay stub.
- Information on investments when you’ve had either capital gains, realized capital gains, or losses.
Keep in mind that with the new tax law, some tax strategies that you’ve used in the past may not work for you anymore, and your recommendations may change accordingly.
The New Tax Law and You
The new tax law has sparked a lot of discussion around taxes, and that’s a good thing. The more you’re aware of how taxes impact your wealth, the better off you’ll be. Many of the tax law changes may not impact you, but it’s important to understand the ones that will.
To give you an idea of how the new tax law could impact you, I jotted down a few ways it’s going to impact me and my family:
- We pay more than $10,000 in SALT, but we don’t pay nearly as much as others in the New York City area. We own property in Suffolk County, which is relatively low tax in comparison to Nassau County or Westchester (or most of New Jersey, for that matter).
- As the owner of Cultivating Wealth, we’ll receive some new benefits that are specific to owners.
- This is the first year in 15 years that my husband and I likely won’t itemize our taxes. The increased standard deduction for married couples filing jointly is $24,000, and that means that a lot of the itemized deductions we were taking won’t necessarily put us over that new amount.
At Cultivating Wealth, our goal is for clients to experience “no surprises” when it comes time to file their taxes. Now that we’re in the second half of the year, it’s an excellent time to take a look at how taxes are impacting your financial life, and what you can do to minimize their impact on your income if possible.
If you’re ready to take a closer look at your tax plan, reach out to us today. We don’t prepare tax returns, but we may also be able to refer you to a tax professional if you need one.
Cultivating Wealth and its affiliates do not provide tax, legal or accounting advice. While we do provide tax planning assistance, we are not Certified Public Accountants. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.