Originally published in Wealth Point, November 2018
While it’s always important to review tax planning strategies before year-end, it is especially important this year, given the significant changes from The Tax Cuts and Jobs Act passed late last year.
The Tax Cuts and Jobs Act implemented many substantial changes that have meaningful impact for taxpayers and business owners. As such, it’s likely that you’ll need to utilize different strategies to minimize the drawbacks and take advantage of new benefits. Here are some common tax scenarios to consider as you prepare for year-end.
For most people, the most common type of itemized deduction involves charitable contributions, which means that your charitable giving may require a second look with this new tax law. Many people may end up taking the standard deduction for the first time in years, due to the elimination of most miscellaneous itemized deductions and the $10,000 cap on state taxes paid.
One strategy you may want to consider is to “bunch” your donations over multiple years, so that you donate less frequently, but in larger amounts at one time (for example, donate $10,000 every two years versus $5,000 per year). By bunching donations, you could get a greater tax benefit by boosting total itemized deductions to be greater than the standard deduction in certain years. We encourage you to speak with your advisor about how “bunching” your donations may impact your taxes and wealth plan.
If you’ve been working for some time, it’s likely that you haven’t checked your annual withholdings. But this year, with the new tax laws, there were changes to tax rates and tax brackets, standard deductions, and personal exemptions, to name a few. So what does this mean? These tax changes could translate to your having too little or too much tax withheld from your paychecks.
You can use the IRS Withholding Calculator to check that you are withholding the right amount from your paychecks. You can also consult your tax professional to review your projected taxes for this year and make sure you have the right amount withheld. If you need to change your withholding, complete a new Form W-4 and submit this to your employer as soon as possible.
The new tax law also lets people withdraw up to $10,000 per beneficiary each year from their 529 plans for certain non- college educational expenses. As long as the $10,000 is used to cover expenses for elementary through high school education, these withdrawals are not considered taxable income for federal tax purposes, which can help alleviate the costs of public or private schooling.
It’s important to note that not all states have gone along with this change. Every state’s plan is different so it’s critical that you review the state laws where your 529 plans are invested. New York, for instance, will tax any withdrawals used for non- college expenses. We recommend that you discuss educational expenses with your advisor and tax professional to avoid any unintended state-level taxation.
Divorce is not a pleasant life event and one that may not apply to everyone, but if you’re in the process of separating from your spouse, it may make sense to try to finalize the divorce by the end of 2018. Under the new tax law, starting in 2019, deduction for alimony payments is no longer allowed (and those who receive alimony payments will no longer have to include them in their taxable income).
This tax change can be substantial for those individuals who have to pay alimony, so it may be worthwhile to finalize your divorce agreement before the end of the year. Alternatively, if you receive alimony payments, you may want to review your taxes for upcoming years to determine what impact this change will have on your taxable income. Your advisor can help you consider these scenarios and make sense of how these tax changes impact your wealth plan.
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