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Nine Things to Consider in the Next Few Months to Plan for the New Tax Law

John J. FureyMay 15, 2018

Taxes

A client asked me what are the most important things to consider in the next few months to plan for the new tax law that is effective in 2018?

  1. Decide on your end goal for tax year 2018
  • What do you want the outcome to be when you file your taxes in early 2019?
    • Receive a refund
    • Pay very little taxes
    • Pay a substantial amount, but do not owe any interest and penalties. If you want this outcome, you need to have paid by 12/31/18 through withholding and estimated taxes the lesser of 1) 110% of your 2017 total taxes (or 100% if your Adjusted Gross Income was 150K or less); 2) or 90% of your estimated 2018 total taxes.
  1. Check your withholding
  • If you have amounts withheld from your W-2 wages or pension payments the withheld amounts probably decreased in February or March because the IRS issued new withholding tables to reflect the lower tax rates in the new tax law.
  • If you are an HFA tax client you can send us a recent wage or pension paystub and we will do a tax projection to determine if you are having enough withheld.
  • If you are not an HFA tax client you should ask your tax advisor to check to see if you are having enough withheld or you can go online to the IRS website where there is a tool to calculate if you are having enough withheld. Here is an IRS news release with a link to the tool encouraging taxpayers to do a paycheck checkup.
  1. Check your estimated quarterly tax payments
  • If you are an HFA tax client you can let us know if you expect your income in 2018 to be substantially different from 2017. We prepared your quarterly tax vouchers for 2018 using the new tax rules and approximately the same income as 2017. We will do a tax projection to determine if you are paying enough in quarterly payments.
  • If you are not an HFA tax client you should ask your tax advisor or check yourself to determine if you are paying enough to meet your goal for the 2018 tax year.
  1. Decide about using the new higher Standard Deduction or to Itemize Deductions
  • Here are the new higher Standard Deductions:
    • Single: 12K
    • Single (age 65+): 13.6K
    • Joint: 24K
    • Joint (both 65+): 26.6K
    • Head of Household: 18K
    • Head of Household (65+): 19.6K
  • If you plan to itemize your deductions because you think that they will exceed your Standard Deduction here is a list of what you can deduct:
    • Medical expenses that exceed 7.5% of Adjusted Gross Income (AGI)
    • Real Estate Taxes and State & Local Income Tax or Sales Tax limited to a maximum amount of 10K
    • Mortgage interest on debt up to 1M (incurred before 12/15/17) or debt up 750K (incurred after 12/14/17)
    • Charitable contributions up to 60% of AGI for cash or up to 30% of AGI for stock
  • If you itemized your deductions for 2017, you can estimate your 2018 deductions by using the total of your 2017 deductions and reducing the total by 1) the amount of your deduction for taxes that exceeded 10K; 2) any Miscellaneous Deductions (not allowed in 2018); and 3) any extraordinary deductions that will not reoccur in 2018.
  1. If you do plan to itemize your deductions, pay as much as you can in 2018
  • In 2019 the medical expense deduction will be limited to expenses that exceed 10% of AGI. So any medical expenses that you can pay in 2018 will be subject to the lower floor of 7.5% of AGI.
  • If you plan to make charitable contributions over the next several years consider establishing a donor-advised fund in 2018 and, if possible, contribute to the fund the total of all the years’ contributions. You can deduct in 2018 the full amount of the contributions made to a donor-advised fund. You can then pay out donations to charities over the next several years. Here is a link to the Schwab Charitable website that provides additional information about donor-advised funds.
  1. If you plan to itemize your deductions consider using highly-appreciated stock for charitable contributions
  • By using highly-appreciated stock to make a charitable contribution you get to deduct the full fair market value of the stock on the date of the gift and you avoid paying capital gains tax on the increase in the value of the stock above what you paid for it.
  1. If your AGI is approaching certain amounts where 1) tax benefits start to phase out; 2) additional taxes start to apply; or 3) higher Medicare premiums will apply, you should try to manage your income to avoid your AGI crossing over a threshold by a small amount. Here is a list of the important AGI thresholds.
Items based on AGI or Modified AGI Single Joint
Income tax on Social Security Benefits starts at: 25K 32K
Medicare monthly premiums ($188 up to $429) start to increase: 85K 170K
Net investment income tax (3.8%)-Add’l Medicare tax (0.9%) start at: 200K 250K
Child Tax Credit of 2K per child – phase out starts at: 200K 400K
Traditional IRA limits start at (covered by a retirement plan at work): 63K 101K
Traditional IRA limits start at (spouse covered by a retirement plan):   189K
Roth IRA limits start at: 118K 186K
American Opportunity Tax Credit of 2.5K – phase out starts at: 80K 160K
Lifetime Learning Tax Credit of 2K – phase out starts at: 57K 114K
Student Loan Interest deduction of 2.5K – phase out starts at: 65K 135K

 

  1. If you are over 70 ½ and have to take a Required Minimum Distribution (RMD) from your IRA, consider making a Qualified Charitable Distribution (QCD) to a charity or charities.
  • The amount of the QCD is not included in your AGI like an RMD.
  • The QCD can be taken instead of your RMD.
  • You do not get an itemized deduction for the QCD
  • A QCD is limited to 100K per year
  1. Don’t worry about triggering the Alternative Minimum Tax (AMT)
  • The AMT exemption amount has been increased to:
    • 55.4K (single) and 109.4K (joint)
  • The phase out of the exemption has been increased:
    • From 82K to 500K (single)
    • From 164K to 1M (joint)
  • As a result of the above increases the Tax Policy Center estimates that the AMT is expected to affect about 200K taxpayers in 2018 compared to about 5.3M in 2017. 

If you have any questions about the new tax, please do not hesitate to contact our office (610-651-2777) and we would be happy to help.