I love talking about taxes. That makes me unique, I know. You know what else is unique? This is a blog post that has good news about taxes. Really.
What to watch for
Congress passed new tax laws—most of which take effect in 2018—known as the Tax Cuts and Jobs Act (TCJA) of 2017*. So your 2018 tax return, which you’ll file by mid-April 2019, will be the first one under these new rules. For some taxpayers, changes include new tax rates, an increased standard deduction, and limited itemized deductions (more on that below), but the biggest change is the new look of the tax forms (check out the new IRS Form 1040). And that alone may make filing easier for a lot of taxpayers. (I told you there’d be good news!)
Here’s my rundown of the 3 things you should consider now as you file your 2018 taxes:
- Income tax rates changed. Individual tax rates are mostly lower across the board. Not only does this mean you may pay less in income taxes, but you may have the chance to “fill your tax rate buckets.” That means if there’s still room before you move up to the next income tax rate, consider doing a partial Roth IRA conversion to take advantage of that space. Yes, you have to pay taxes on the amount you convert. But this move may pay off for you now and in the future. You may pay less taxes on the money you convert now, and you’ll have income-tax-free withdrawals from the Roth IRA later (as long as you’re age 59½ or older and you converted your account at least 5 years ago).**
- The standard deduction increased and itemized deductions rules were either eliminated or limited. The standard deduction for the 2018 tax year nearly doubled.
|Taxpayer filing status||2017 tax year standard deduction†||2018 tax year standard deduction†|
|Married, filing jointly||$12,700||$24,000|
†Additional standard deduction applies to taxpayers age 65 and older or blind.
The Tax Foundation estimates 10% of all taxpayers will be itemizing their deductions in the 2018 tax year (30% itemized in the 2017 tax year). So make sure you’re coordinating your deductions to benefit from these rules.
Now for the bad—but not-so-bad—news. (Sorry! You knew there had to be some, right?) The new tax laws:
- Eliminate the personal and dependent exemptions, which were scheduled to be $4,150 in 2018. I say this isn’t all bad news because the laws expanded the child tax credits and introduced new family tax credits, so many taxpayers will qualify. In fact, these changes may more than make up for the loss of personal exemptions and dependency deductions.
- Cap the amount of state and local property, income, and sales taxes (SALT) that you can deduct to $10,000. So if you live in a state with high income and property taxes (like I do, a proud New Jerseyan) and have always itemized, be sure to run your 2018 taxes with this new $10,000 cap. Then compare the result with the amount you’d owe (or get in a refund) if you simply took the new, increased standard deduction—you may be pleasantly surprised. The reality is that, before, many of my fellow New Jerseyans didn’t get the benefit of their real estate and state income tax deductions because of their exposure to the alternative minimum tax (AMT), but the buzz around the SALT cap reverberated throughout 2018. Not many New Jerseyans will be subject to AMT under the new rules, so there’s some more good news!
- Make minor changes to charitable giving deductions. You can still benefit from making donations, but you’ll need to be more strategic and intentional about your giving. For example, consider a couple that typically donates $10,000 a year to their favorite charity. Rather than giving the annual $10,000, they could accelerate the next 3 years’ worth of charitable gifting into 1 year by giving to a donor-advised fund. In other words, they’d donate $30,000, which, along with SALT tax deduction and any mortgage interest, exceeds the $24,000 standard deduction. Then they’re able to itemize and potentially get the benefit of that “bunched” charitable deduction that year. For the next 2 years, they don’t necessarily need to give again, so they may choose the standard deduction. And remember, you still greatly benefit from donating your appreciated securities or using qualified charitable distributions (QCDs), if you qualify, from your IRAs to help fund a higher giving amount.
- Pass-through business owners may get a break. The new law introduced a 20% deduction for income from pass-through businesses and certain real estate investment trust (REIT) dividends; it’s called the “qualified business income” (QBI) deduction. In effect, this deduction may reduce the top tax rate of these business owners to about 30%. These rules may limit the deduction for certain service providers such as accountants, attorneys, and physicians. The IRS recently issued regulations to guide taxpayers and professionals through the specific rules for this new and potentially valuable tax deduction.
Run the numbers
Don’t worry if you didn’t take advantage of these changes on your 2018 tax return because I have even more good news: You have plenty of time this year to prepare for your 2019 taxes.
And since this is the U.S. tax code we’re talking about, there are many more changes I didn’t cover. Check out all the updates or work with a qualified tax advisor to make sure you get all the benefits you’re entitled to.
*This law is scheduled to sunset after December 31, 2025.
**The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you’re under age 59½ and you have 1 Roth IRA that holds proceeds from multiple conversions, you’re required to keep track of the 5-year holding period for each conversion separately.
- All investing is subject to risk, including the possible loss of the money you invest.
- The amount you convert to a Roth IRA isn’t subject to the 10% penalty charged on traditional IRA withdrawals taken before you reach age 59½.
- Withdrawals from a Roth IRA are tax-free if you’re over age 59½ and have held the account for at least 5 years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate 5-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
- Please consult an independent tax or financial advisor for specific advice about your individual situation.