Tax Planning and the Holiday Spirit

The classics are still there – capital loss harvesting, making a big purchase for your business, maxing out your 401k contribution - but what’s changed with The Tax Cuts and Jobs Act?  This Thanksgiving, the new era of tax planning will be the hottest topic at the dinner table.

The Season of Giving – Everyone knows that silly socks make excellent gifts, perhaps second to none other than the tax-deductible charitable contribution.  But those will be harder to find this year.  The standard deduction has doubled to $12,000 ($24,000 for married taxpayers) and the deduction for combined state, local and property taxes is now limited to $10,000, leading to projections that fewer than 10% of taxpayers will itemize their deductions in 2018, down from roughly 30% in 2017.  Making your gifts tax deductible may require some maneuvering, such as making your Required Minimum Distribution (RMD) directly to charity or setting up a charitable trust or donor advised fund to allow a current tax deduction for future charitable gifts.

Home for the Holidays – There is a shift in the U.S. housing market and interest rates are on the rise.  Those in the market for a home should always consider how their new tax situation will affect their monthly budget, and the new tax act has changed the math.  While mortgage interest is still deductible, the increased standard deduction and limited deduction for property taxes mean that the tax incentives of homeownership have been reduced or eliminated for many taxpayers.  The good news?  Gingerbread houses, while not tax-deductible, are still delicious, festive and fun.

A bundle of joy Personal exemptions are gone, but the child tax credit doubled.  Most taxpayers will net upwards of $500 per year per child under age 17 from this change.  A 2017 study by the USDA estimated that raising a child costs an average of $14,000 per year.  Make that $13,500! 

Secret Santa – Forget an Xbox, what kids really want these days is a contribution to their 529 College Savings Plan.  Accounts offer low minimums, easy setup, and the funds grow tax-free if used for qualified education expenses, which now include private K-12 tuition in addition to college costs.  

Don’t get a lump of coal – The Tax Cuts and Jobs Act will create a reduced tax liability for most taxpayers at each income level.But that doesn’t mean everyone will get a refund for 2018.The IRS changed their withholding calculations in February, creating larger paychecks for workers in anticipation of the reduced tax rates.But every taxpayer’s situation is different, and many will not see a tax cut to match the reduced withholding, meaning they will owe in April.As a result, the IRS recommends performing a “paycheck checkup” and has provided a Withholding Calculator on their website.As always, Stephen Paul is here to help you prepare, because nobody wants an unexpected tax bill in their stocking.

Stephen A. Paul, CPA