The Tax Cut and Jobs Act (TCJA) has certainly been the topic of discussion lately. Everyone wants to know if they will see a reduction in taxes, or if in fact their taxes will go up. The short answer is: It Depends!
There are so many changes, with some impacting you positively, some negatively. It really depends on your individual situation. I am not going to summarize all of the changes, as you can find that online. However below are some tips to consider to help you determine how the changes may impact you. Remember these changes impact your 2018 taxes, not your 2017 taxes.
Tax Reform: Will Your Taxes Go Up Or Down?
Here are some things to consider doing this year to avoid a tax surprise next year . . .
Get a preview of your 2018 taxesAsk your accountant to run a mock 2018 return after 2017’s taxes are finished. Doing this and looking at what the numbers will look like can flag potential issues. It also prepares you so that you won’t have any unpleasant surprises.
Revisit your withholdingsThe new tax law means that the W-4 you filled out many years ago may need to be adjusted. The IRS came out with new withholding tables on January 11 that reflect changes such as the elimination of personal exemptions in the new tax law. But has yet to release an updated withholding calculator or a revised W-4 form.
If you leave your W-4 as is, you could wind up withholding too little, which will create an unpleasant tax bill. Workers in higher tax brackets who receive large bonuses could see a higher tax bill next year if they don’t adjust W-4s.
Watch for State and Local Income Tax (SALT) workaroundsA big change that could affect many taxpayers is the controversial cap on state and local income tax (SALT) deductions. The deduction, which used to be unlimited, will be capped at $10,000 next year. The new law’s increase of the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly does mean fewer will itemize, but residents of high-tax, high-income states like California could wind up paying thousands of dollars more.
California is currently creating a workaround in an attempt to keep residents from seeing a big spike in federal taxes next year. Strategies being explored include plans to replace a state income tax with an employer-side payroll tax, and/or a system of tax credits for charitable donations made to state funds that support areas like education and health care. It’s not clear whether these attempts will be possible, especially since the Trump administration has pledged to fight such efforts.
Bunch up your donationsTo try and get around that new SALT limit, one strategy for those who regularly donate to charity is to bunch up into one year what they would have given over multiple years. For those who itemize, charitable donations remain deductible on federal returns and can help increase taxpayers above the standard deduction hurdle. By putting a few years’ worth of donations into a Donor Advised Fund (DAF), you can take the deduction the year you put the money in and distribute the money to charity over multiple years.
Home equity loan deductionsThe deductibility of interest on home equity loans and lines of credit (HELOCs) has been a big source of confusion. The new tax law lowered the amount on which interest expense on “acquisition indebtedness” could be deducted — from $1 million to $750,000 for new loans made after December, 14, 2017. It also eliminated the interest deduction on loans that are not used to ‘buy, build or substantially improve’ a home.
Going forward, if you take out a HELOC and use some of the money to buy a car, or pay off credit cards, you cannot deduct that interest. However, if you use the money to fix up your house, that may still be deductible.
Expanded college savings plan usesThe new tax law expands the allowable use of tax-exempt 529 college savings plans for education costs that accrue while a child is between kindergarten and high school graduation. However, while the U.S. government may say taxpayers can use 529 money for K-12 expenses, California may consider such a withdrawal a non-qualified distribution and could charge you penalties. I am still waiting to see what California decides on this issue.