Now that the tax bill has been passed by both the house and senate, and we have some idea what’s in it, we have a few days left in the year to implement some potentially beneficial tax planning strategies. At present, the changes to the individual tax code (as opposed to the corporate tax code) are scheduled to sunset in 2025, but they could be made permanent or repealed prior to that point, depending on the political climate.
One change that will affect many of my clients is the increase in the standard deduction amount to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is not changed by the bill. That means that taxpayers who have been claiming itemized deductions in the past at less than those amounts will likely be claiming the standard deduction in 2018.
If that’s the situation for you, pre-paying itemized deduction items before the end of the year would probably be beneficial. If you have any questions about whether this would be a good option for you or what those could be in your specific situation please let me know.
One important exception to that guidance relates to another change in the tax bill, which caps the deduction for combined state and local income and property taxes at $10,000. The bill specifies that taking a deduction in 2017 for prepaid 2018 state income taxes is prohibited. The actual mechanics of how that will be accomplished haven’t been determined yet, but prepayment of 2018 state income taxes is the one prepayment of an itemized deduction item that is not recommended at this point.
The phaseout of itemized deductions for higher income taxpayers is repealed. So for some taxpayers deferring payment of itemized deduction obligations until 2018 might be more beneficial. Again, if you think that might apply to you please contact me.
Another change that will affect many of my clients is that the itemized deduction for interest paid on home equity loans is repealed beginning in 2018. So the effective after-tax rate on home equity lines of credit is increasing, although it is still a low interest way to borrow. It certainly makes taking out a new HELOC less appealing, however. And if funds are available to pay off an existing line of credit that is worth considering.
The personal exemption deduction is also repealed, meaning that even with the increased standard or itemized deduction amounts, your taxable income may actually be higher than it was under current law. Tax rates are decreased for many taxpayers under the new law, however, and there are a few other changes detailed below so most taxpayers will pay lower federal taxes until the new individual provisions sunset, if they do.
The child tax credit is being increased to $2,000 per qualifying child, with $1,400 of that being refundable. A new nonrefundable $500 credit is now allowed for non-child dependents as well. The income threshold at which the credit is phased out is also increased to $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers.
Many of my clients will be affected by the new provision allowing a deduction for 20% of “qualified business income” from partnerships, S-Corporations, or sole proprietorships, as well as a deduction for 20% of qualified Real Estate Investment Trust dividends, qualified cooperative dividends, and qualified publicly traded partnership income. There are limits and phaseouts of various kinds to the deduction, but for most self-employed taxpayers it should create a substantial tax benefit.
The new law allows up to $10,000 in tax-free distributions from education savings or “529” plans for elementary or secondary school tuition.
For divorce or separation agreements executed after December 31, 2018, any alimony paid will not be deductible by the payer or treated as income for the recipient. Divorces or separation agreements entered into prior to that date will receive the old tax treatment.
Finally, some changes that were discussed while the bill was in Congress did not end up in the final version. The following is a partial list of things that did not change: the $250 deduction for educator expenses remains; the rules governing the exemption from income of capital gains on the sale of a primary residence remain the same; the deduction for interest paid on student loans remains, and the education credits also remain the same; the allowed methods of identification of securities sold remains the same.