Tax Planning

Tax Planning February 2018. I hope by now that most of you have either filed your 2017 tax return or will do so soon. Identity theft is rampant and, unfortunately, the Internal Revenue Service (IRS) is a very popular target. Don’t let a hacker file your tax return and get your refund. Filing early is your only defense.

President Trump signed the Tax Cuts and Jobs Act (TCJA) into law in December. By now you have probably learned of the headline changes: lower tax rates, bigger standard deductions, elimination of the personal exemption, $10,000 limit on the deduction of state and local taxes, mortgage interest deduction capped to a mortgage of $750,000, etc. You may have even already seen an increase in your after-tax paycheck this month.

Going forward, what else can you do? A little strategic tax planning may pay off handsomely. Below are four areas where careful planning may save you big bucks this year and next:

 

Medical Expenses

TCJA lowers the threshold for deducting medical expenses for all taxpayers from 10% of adjusted gross income (AGI) to 7.5%. This change kicks in in 2017 and ends on December 31, 2018. Fortunately, for most of us even accruing medical expenses above 7.5% in any year isn’t common. However, if you or someone else in your family experiences a major medical emergency this year, you may want to go ahead and load up on all kinds of other medical services such as elective surgery, major dental work, therapy, eyeglasses, drug prescriptions, etc. For example, if your AGI is $50,000 and you paid $6500 in medical bills, you would be able to deduct $2750 ($50,000 X 0.075 (7.5%) = $3750. $6500 – 3750 = $2750). By bunching as many of your medical expenses into 2018, you may be able to take the deduction. Remember that this deduction is for unreimbursed medical expenses. Keep those receipts!

Please note: The drop in the threshold for this deduction is for 2017 and 2018 only. It goes back to 10% on January 1, 2019.

 

Charitable Deductions

The same bunching concept applies here. Itemizing deductions may not be practical for many Americans since the standard deduction has risen to $12,000 for single filers and $24,0000 for married couples. However, by bunching your contributions all into one year, you will be more likely to be able to itemize deductions. For example, let’s say you pledged to give your alma mater $1000/year. By giving them $3000, $5000, or more in any one year, you will be much closer to itemizing. Depending on what other expenses you have to itemize, you can wait until late in the year to increase your charitable contributions.

This strategy is especially attractive for high earners since the TCJA has eliminated the Pease limitation on itemized deductions.

 

529 Plan Money for Pre-College

You can now withdraw up to $10,000 from your 529 plans to pay for your children’s pre-college education expenses. If your state allows a state income tax deduction for all or a portion of your annual contribution, you may be able to contribute your children’s elementary and high school expenses – expenses you have anyway – into your 529 accounts and soon withdraw it. Please note that as of this writing, only Wisconsin and Montana have eliminated this loophole.

Caution: While it may look attractive to withdraw from your 529 accounts today, these plans are meant for long-term, tax-deferred growth. If you continuously deplete the account before your child gets to college, there may not be much left for the costly years at university.

 

Retiring to Florida or Texas?

The $10,000 limit on property tax plus state and local taxes per filing (not per person) may make you want to leave expensive cities and states sooner rather than later. If you were contemplating a move to Florida, Texas, Nevada, etc. because these states do not have an income tax, moving sooner rather than later can save you a lot of money.

Please let me know if you have any questions or comments. Consult your tax professional for detailed advice on your situation.

 

Thanks,

Henry Gorecki, CFP®