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2018 Tax Planning

2017 – what a year! New leadership in the White House brought policy changes, natural disasters devastated the nation, major market indexes continuously hit new highs, and we closed the year out with the signing of the Tax Cuts and Jobs Act into law – the largest tax reform legislation since 1986.

How will the new tax law affect you?

By now, you’re likely aware of the major tax provisions that will take effect this year. In this post, we aim to address how this monumental overhaul in legislation may affect your long-term financial planning goals and things you may want to consider.

Some of the more alarming proposals affecting most investors – such as severely limiting tax-deferred contributions to retirement plans or eliminating the beneficial tax treatment of investment sales – were NOT included in the new law. We can breathe a collective sigh of relief.

Additionally, some provisions make certain planning options more attractive.

  • Now that up to $10,000 per year of funds in a 529 College Savings Account can be used toward qualified K-12 costs, parents and grandparents may want to consider ramping up savings to these tax-advantaged accounts.

  • For 2017 and 2018, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their Adjusted Gross Income (10% prior), if they itemize.

  • Some small business owners may come out ahead. Certain “pass-through” businesses – those structured as S-corporations, LLCs, partnerships, and sole proprietors – may be able to start deducting 20% of their qualified business income.

But there are, of course, strategies that will be lost due to the Tax Cut and Jobs Act.

  • Planning on tapping into the equity in your home? Or perhaps you have been deducting interest on an existing home equity loan or line of credit. Starting this year, homeowners may no longer deduct the interest on new or existing loans for purposes other than acquiring, building, or substantially improving a residence.

  • Charitable contributions may become more “expensive”. The increased standard deduction plus the reduction or elimination of many itemized deductions means fewer taxpayers are expected to itemize. As a result, the income tax deduction for charitable contributions will be lost for many who do not itemize. However, there are alternative options to consider, like Donor Advised Funds.

  • Those who choose to Roth convert in 2018 onward will lose the ability to recharacterize those conversions. In plain English, many who pay the taxes to convert their Traditional IRA into a Roth IRA may later want to “undo” this decision, especially if the value of the converted investments fell. The new tax law now prohibits this.

The bottom line – while you won’t be able to file your taxes on a postcard, many of the fundamental financial planning strategies we commonly use can still be employed.

It should be noted that many provisions are scheduled to sunset after 2025. If you’d like additional information on this subject or how it may affect your financial goals, please contact us.