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June 12, 2018

Thinking Ahead to Next Year: Changes to Taxes Under the New Law

As tax accountants, thinking ahead to all the changes that will go into effect with next year’s returns, thanks to the passing of the federal government’s Tax Cuts and Jobs Act (TCJA), is one of the top things on our minds these days at Wendroff & Associates. We want to help all of our clients be as prepared as possible, and their finances in the best shape.

Some may still not be aware of how the TCJA will impact them personally, as well as professionally if you’re a business owner. Below are just a few of the changes we are expecting with the passing of the TCJA. Now is the perfect time to start preparing for these changes, by taking a good look at your finances and taxes and considering changes you may want to make now in preparation for next year’s tax return:

Exemptions and Deductions

The good news is that the standard deduction for most families has nearly doubled under the TCJA. The bad news is that the Act has all but done away with personal exemptions.

For most people, the good will outweigh the bad in this scenario; the bump up from the higher standard deduction will more than make up for the loss of personal exemptions. However, if your family is accustomed to taking several personal exemptions on your taxes each year, you may want to take a closer look at this now, and determine how this change will affect your 2018 return in April.

Another reason to take a closer look now is the increased limitations on itemized deductions under the new tax law. Fewer Americans are expected to take itemized deductions next year due to the higher standard deduction.

For example, there is a new limit on mortgage deductions for 2018 and beyond. Taxpayers can only claim deductions on mortgages up to $750,000, or $375,000 if married and filing separately. This is down from the previous $1 million or $500,000 for spouses filing separately. This applies to all home purchases that entered the binding contract phase after Dec. 16, 2017.

The limit on deductions for charitable donations has also changed. Previously, taxpayers were allowed to deduct for donations of up to 50 percent of their adjusted gross income; that amount was raised to 60 percent. However, if a donation entitles one to college athletic game tickets, a deduction is not allowed.

If you have a child that attends private school, there is good news – families can now deduct up to $10,000 per year per student for K-12 education. Some tax experts suggest that, for families who don’t even have children in school yet, they may want to start saving through a 529 plan–previously only available for older, college students–immediately, with themselves designated as the owner or beneficiary until time they need to use it, and changing it into the child’s name later.

Roth Conversions

If you have previously relied on doing multiple Roth recharacterizations or conversions as needed to help you avoid taxes on some savings, you will definitely need to rethink your strategy for 2018 and beyond.

“Starting this year, reversing a conversion of a traditional individual retirement account into a Roth individual retirement account isn’t allowed,” CNBC explains.

However, given new tax bracket changes under the TCJA, it may make more financial sense for some people in early retirement to do Roth conversions, since the lower tax brackets are more widely spread apart under the new law.

“More dollars can be converted in those brackets without spilling over into higher brackets,” CNBC’s experts explained.

Medicare and Health Care

In addition, those at or close to retirement age should start thinking seriously about healthcare—in particular, those who are retiring at or after age 65 should sign up for Medicare immediately. As the experts at Financial-Planning.com explained earlier this month, total healthcare costs for Americans throughout retirement are expected to hit $280,000, especially with the passing of the TCJA.

Businesses

For business owners, there is good news as well. C corporations will undoubtedly enjoy the biggest benefits from the TCJA–but businesses with pass-through income have a lot to celebrate too.

“With the new $315,000 threshold limit for the 20-percent pass-through deduction, tax planning to lower income by contributing to defined benefit plans and defined contribution plans is now more important than ever,” the tax experts on CNBC advised recently.

What should you be doing right now?

It’s advisable to meet with your tax accountant or planners now, and check in often throughout the rest of the year, to help make sure you are prepared for these and many other changes taking effect on 2018 tax returns.

In the meantime, Nasdaq made the following suggestions for changes you may want to think about making now in order to decrease your tax liability as much as possible before April of 2019. They are:

  1. Max out tax-deductible contributions to your retirement accounts
  2. Consider raising your mortgage payment to trigger bigger tax breaks
  3. Consider harvesting losses to write off capital gains and reduce your tax bill
  4. Keep track of your finances

Please remember, tax planning is our specialty here at Wendroff & Associates, CPA. Please give us a call or email us if we can meet with you and help you start preparing for all the changes under the new tax law, rather than at crunch-time next spring!

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