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Taxes
John J. FureyJanuary 23, 2019
Taxes
A client asked about the ways to lower taxes under the new tax rules?
The Tax Cuts and Jobs Act (Tax Act) passed in December 2017 took effect on January 1, 2018 for individual taxpayers. Individual tax returns for 2018 will be processed using the new rules of the Tax Act. Two of the most significant changes are:
There are some actions that taxpayers can take to reduce their Adjusted Gross Income (AGI) or their Taxable Income even with the significant changes to the Standard Deduction and Itemized Deductions.
Here are the changes.
Increases in the Standard Deduction
| Tax Year 2017 | Tax Year 2018 | Tax Year 2019 | |
| Single | 6,350 | 12,000 | 12,200 |
| Single (age 65 or older) | 7,900 | 13,600 | 13,850 |
| Married (filing joint) | 12,700 | 24,000 | 24,400 |
| Married (one person 65 or older) | 13,950 | 25,300 | 25,700 |
| Married (both 65 or older) | 15,200 | 26,600 | 27,000 |
| Head of Household | 9,350 | 18,000 | 18,350 |
| Head of Household (65 or older) | 10,900 | 19,600 | 20,000 |
Changes to Itemized Deductions:
| Tax Year 2017 | Tax Year 2018 | Tax Year 2019 | |
| Medical Expenses | Must exceed 7.5% of AGI | Exceed 7.5% | Exceed 10% |
| State/ Local Income & Real Estate Taxes | No limit on deduction | Limited to 10K | Limited 10K |
| Mortgage Interest* | Mortgage debt up to 1M | Debt up to 750K | Debt up to 750K |
| Charity | Cash up to 50% of AGI | Up to 60% AGI | Up to 60% AGI |
Miscellaneous Itemized
|
Must exceed 2% of AGI | Eliminated | Eliminated |
*If the mortgage debt was incurred before 12/15/17, interest on such debt up to $1 million is still deductible. In 2018 and 2019 the interest on home equity debt is deductible provided the debt is used to buy, build or substantially improve the home that secures the debt. The interest on home equity debt and mortgage debt incurred after 12/14/17 is only deductible on total debt up to $750,000.
Beginning in tax year 2018 most taxpayers will only be able to deduct the following 4 items:
If the above 4 deductions do not exceed your Standard Deduction, you do not need to assemble data on itemized deductions to prepare your 2018 federal tax return. It is estimated that for tax year 2017 about 33% of taxpayers itemized their deductions and for tax year 2018 only about 10% will do so.
Strategies to Reduce your Adjusted Gross Income
There are many reasons to try to reduce your AGI. Some of the important items that are determined by your AGI are:
Some ways to reduce your AGI are:
Here is a link to a recent Wall Street Journal article about QCDs
Strategies to use the higher Standard Deduction and Itemized Deductions to reduce taxes
The taxpayers need to pay a medical bill of 12.4K that they could pay in 2019 or 2020. They also have stock held for more than 1 year (20K market value with a 5K tax basis) available to prepay their charitable contributions for the next 4 years.
The taxpayers decide to pay the medical bill in 2019 and to contribute the stock to a donor advised fund in 2019. A contribution of stock to a donor advised fund is deductible in the year it is made. The deduction amount is the fair market value of the stock on the date of the contribution. No capital gains tax is due when stock is contributed to charity.
Their total Itemized Deductions in 2019 are now 54.4K (22K +12.4K + 20K). If the taxpayers are in the 24% marginal tax bracket, they would reduce their taxes by 7.2K by grouping their deductions in 2019 (54.4K minus 24.4K standard deduction = 30K times 24%).
In addition, the taxpayers avoided at least 2.2K in capital gains taxes by donating the stock (gain of 15K x 15%).
In the next few tax years the taxpayers plan to use the Standard Deduction to prepare their tax returns.
Information about Donor Advised Funds (DAF)
If you have any questions about tax issues, Qualified Charitable Distributions or Donor Advised Funds, please do not hesitate to call our office (610-651-2777). We look forward to a productive tax season! Let us know if we can help.
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