The end of the year is approaching fast and that means it is time to take advantage of year-end tax planning. With the new tax law changes from the Tax Cuts and Jobs Act, there are a few things to be aware of. There will be many taxpayers who had previously been itemizing that will now take the standard deduction. How will this affect a taxpayer’s 2018 tax liability? Below are some useful tax planning tips to help navigate these new Federal tax law changes.
The standard deduction for the 2018 tax year has nearly doubled from the previous year. In 2017, the standard deduction was $6,350 for single filers and $12,700 for married joint filers. The standard deduction for 2018 is $12,000 for single filers and $24,000 for married joint filers. Also, personal and dependent exemptions have been eliminated. Many taxpayers who have itemized in previous years might have to take the standard deduction for 2018.
The new tax law has made some significant changes to itemized deductions. The percentage of adjusted gross income (AGI) for deductible medical expenses has decreased. The amount of deductible state and local taxes allowed is limited to $10,000 in total. This includes sales, state, and property taxes combined. The percentage of AGI for current year deductible cash charitable contributions has increased. If taxpayers have previously relied on high state and local taxes to push them in the itemized deductions category, they might be finding themselves taking the standard deduction in 2018. The Pease limitation, which put a cap on the amount of itemized deductions allowed based on income thresholds, has also been eliminated for 2018 through 2025.
Charitable Contribution “Bunching”
The cash charitable contribution limitation has increased from 50% to 60% of AGI for 2018. The term “bunching” refers to making a larger charitable contribution in the current year instead of making smaller contributions over the next few years. By making multiple years of contributions in one year, it could push taxpayers over the standard deduction amount and they would have the opportunity to itemize again. This could provide a benefit in a year in which taxpayers will have higher income. For more information on charitable “bunching” please click the link below.
Medical Expense Deductions
In previous years, medical expenses were only deductible if they exceeded 10% of AGI. For 2018, the percentage of AGI has decreased from 10% to 7.5%. In 2019, the percentage reverts back to 10%. If there are foreseeable medical expenses, taxpayers may want to consider incurring those expenses by the end of 2018 in order to take advantage of the potential tax benefits.
Miscellaneous 2% Deductions
Under the new tax law all miscellaneous itemized deductions subject to 2% have been eliminated. Some of these deductions include investment expenses, tax preparation fees, and unreimbursed employee expenses. These will no longer be included in computing a taxpayer’s total itemized deductions for 2018.
Maximizing Retirement Contributions
One way to consider lowering taxable income is to make accelerated contributions to a retirement account. If contributions to a retirement account can be maximized by the end of the year, it could result in a decreased tax liability. If a taxpayer will not have enough itemized deductions under the new law, this could be a great way to lower taxable income.
With the new tax law changes, some taxpayers may find themselves under withheld for 2018. Taxpayers who have previously itemized could potentially have a higher tax liability in 2018 if they no longer qualify to itemize and must take the standard deduction. If this is the case, employees may not have been withholding the right amount of tax throughout the year in order to cover the taxes owed with the new changes.
While federal law has significantly changed year-end planning, keep in mind that California has not conformed to many of these changes. It is important that you discuss your financial situation with your L&B team member before the end of the year. If you have any questions or concerns regarding the new tax law changes or how they will affect your taxes, please do not hesitate to call our office at (858) 558-9200.