Tax Reform in 2018: To Avoid Surprises, Start Planning Today

01.30.2018 - Craig Richards, CPA/PFS, CFP

As you start to gather information for your 2018 income tax return, it’s not too early to begin thinking about what your 2019 tax return might look like under the new tax code.

For some individuals, the benefits of a lower tax rate could be overshadowed by the loss of many itemized deductions. Please keep in mind that most of the changes summarized below are scheduled to expire at the end of 2025. So careful planning is strongly advised.

The Upside of Tax Reform
  • The maximum individual tax rate fell to 37%, down from 39.6%.
  • The standard deduction nearly doubled to $12,200 for individuals and $24,400 for married couples.
  • The child tax credit increased to $2,000 for each child under 17 years old.
  • Cash contributions to charity are now limited to 60% of adjusted gross income (AGI), up from 50%.
  • Up to $10,000 in 529 college savings plans can now be used for K-12 tuition each year.
  • The Affordable Care Act individual mandate, which penalized individuals for not having health insurance, has been permanently eliminated.
  • Deductions for out-of-pocket medical expenses are now capped at 7.5% of adjusted gross income for all taxpayers. The limit was previously 10% of AGI for taxpayers under the age of 65.
The Downside of Tax Reform
  • The allowable deduction for interest payments on mortgages created after January 1, 2018 falls to loan indebtedness of $750,000, down from $1 million.
  • Foreign real estate taxes are no longer deductible.
  • Interest on home equity loans is no longer deductible.
  • Deductions for casualty and theft losses will only be allowed in federally-declared disaster areas.
  • Taxpayers are no longer allowed to take miscellaneous items deductions such as unreimbursed employee expenses, tax-preparation fees, investment fees and the cost of safe deposit boxes.
  • Personal exemptions have been repealed.
  • Deductions for income, sales and real estate taxes paid at the state and local level are capped at $10,000. This restriction could be particularly meaningful for residents of high-tax states like Connecticut, New York, New Jersey and California.
  • For divorces that are finalized after 2018, individuals who make alimony payments will no longer be allowed a deduction.
Consider Giving to Charity

We have started running projections for many of our clients—estimating their 2019 tax obligations under different scenarios and looking for steps they can take to reduce those liabilities. With the amount of itemized deductions available reduced, one of the few areas that still offers planning opportunities is charitable giving. Taxpayers should weigh their charitable intent along with their ability to itemize deductions, as opposed to taking the new higher standard deduction.

Charitable giving can come in many different forms using either cash or appreciated property. Again, taxpayers who itemize can now deduct as much as 60% of their adjusted gross income (AGI) for cash contributions to qualified charities, up from the previous limit of 50%.

Think Ahead and Be Prepared

Tax reform raises a number of important questions for individuals: Which itemized deductions are still available? Does it make sense to take full advantage of the higher limit on cash charitable giving? Will you take the standard deduction or do you have enough qualified expenses to itemize? Running the numbers could help answer these questions and provide the groundwork for an effective tax-mitigation strategy throughout the year.

If you have questions about tax reform and how it might affect your tax bill, please reach out to your Fiduciary Trust contact.

This communication is intended solely to provide general information. The information and opinions stated are as of January 30, 2018, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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