The Tax Cuts and Jobs Acts (TCJA) introduced extensive changes that are difficult to understand but will have an impact and it is important to understand what planning opportunities you may have in 2018 to optimize your position. This month, we present the top five TCJA tax planning opportunities for individuals in 2018:
5. Itemized versus Standard Deduction
The TCJA doubles the standard deduction. In 2018, joint filers can enjoy a standard deduction of $24,000. However, the new law suspends personal exemption deductions and eliminates or limits many of the itemized deductions such as capping the state and local tax deduction at $10,000 per year ($5,000 for a married taxpayer filing separately). It also temporarily eliminates miscellaneous itemized deductions subject to the 2 percent floor (tax preparation fees, employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.
What does this mean for you? For those that typically claim the standard deduction, chances are their tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, may result in less tax. If you itemized last year, you may find that you will not itemize this year, or you may be able to itemize for state income tax purposes but not for federal. You will need to run the numbers to assess the impact and depending on the results, you may need to adjust your estimated quarterly tax payments.
4. Qualified Tuition Plans
Qualified tuition plans, also called 529 plans, are a great way to ease the financial burden of paying for college. Before, the TCJA, earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. Now, 529 plans can be used to pay for tuition at an elementary or secondary public, private or religious school (up to $10,000 per year). If you are paying tuition for your children or grandchildren to attend elementary or secondary schools, we encourage you to either set up or revisit your 529 plans.
3. Home Equity Debt Interest
While you may have heard that home equity debt interest is no longer deductible under the TCJA, interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. In other words, it’s treated as home acquisition debt subject to the new $750,000/$375,000 limit. This is good news for homeowners, but it forces you to trace how the proceeds were used. If you used the cash to pay off credit card or other personal debts, the interest isn’t deductible, even if the payoff occurred prior to 2018.
2. Bunch Charitable Contributions
The new law temporarily increases the limit on cash contributions to public charities and certain private foundations from 50 to 60 percent of adjusted gross income. However, the doubling of the standard deduction and changes to key itemized deductions will prevent some of you from itemizing in 2018 and therefore benefiting from this increased limit. One way to combat this is to bunch or increase charitable contributions in alternating years. We suggest you set up donor-advised funds. This will allow you to claim a charitable tax deduction in the funding year and schedule grants over the next two years or other multiyear periods. You can take advantage of the deduction when you’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It’s a win-win situation.
1. Maximize the Qualified Business Income Deduction
Under the new qualified business income deduction under Section 199A of the TCJA, individuals who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. However, the deduction is subject to various rules and limitations and it is critical to understand those rules and limitations.
If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call at 602-482-9101 or email me at nitin.gupta@atlascpas.com.
About the Author
Nitin Gupta is a Partner and CPA at ATLAS CPAs & Advisors PLLC and licensed in California and Arizona as a Certified Public Accountant. With 28+ years of experience, Nitin has been a Tax Consultant with full expertise in federal, state, and local taxation for highly complex corporations, partnerships, individuals, estate, gift, and trust tax returns. He has extensive experience in all aspects of financial accounting in multiple industry segments such as real estate, construction, medical, manufacturing, wholesale, retail, professional services, information technology, and entertainment.
