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Don’t Skip Tax Planning For 2018

Planning Insights

As the 2017 tax deadline approaches, I’ve been setting my sights on tax planning opportunities for 2018 and beyond.

Late last year, President Trump signed the Tax Cuts and Jobs Act.  Most believe the Act was primarily a huge tax cut for corporations; actually, 75% of the projected cut goes to individuals.  This was not the major tax reform I was hoping for, but the 500-page Act simplifies tax compliance and planning in many ways.  

As clients are forwarding their 2017 tax returns for my review, I’m seeing that many tax professionals are providing clients with side-by-side comparisons showing how they would have fared tax-wise if the Act were in effect in 2017.  These comparisons are a good start in seeing what might happen in 2018.

The Administration is expecting that the average family will see a $2,000 reduction in their taxes.  Of course, we should always be careful of averages as “someone with their head in the oven and feet in a bucket of ice feels fine on average.” 

Generally, taxpayers in the higher brackets (taxable income over $200,000/$400,000 for single and joint filers), those with larger families, business owners and those hit by the Alternative Minimum Tax are likely going to see a reduction in their taxes.  For those not in the categories above, the winners and losers are case-by-case, with some facing a large increase in their 2018 taxes. 

Everyone should be running tax projections for 2018.  Waiting to see how things shake out for the year could lead to some big surprises next April.  Here are a few items I’m finding as I run projections:

  • Tax benefits are lost – Because many deductible expenses have been eliminated or capped, it’s estimated that over 90% of taxpayers will be taking the standard deduction going forward.  When using the standard deduction, clients are no longer be receiving a tax break on their mortgage interest, charitable contributions, property taxes, etc.  This changes some people’s planning strategies.
  • Withholding needs to be adjusted – Once you have a good idea how much you will be paying in taxes for 2018, adjust your tax withholding on your paycheck(s), Social Security income, pension income, IRA distributions, or make appropriate estimated tax payments.  The earlier you make these adjustments, the more evenly its impact is spread.  Making these changes late in the year might require large (and painful) adjustments.
  • Deduction bunching strategies can be an excellent solution – Taking a multi-year view to tax planning is more important than ever.  For clients that have deductions very close to their standard deduction ($12,000 for single, $24,000 for married), it might make sense to make multi-year charitable contributions using a Donor Advised Fund (DAF).
  • Roth conversions strategies might make good sense – For those in the lower tax brackets, making a (partial) Roth conversion could move some money so that future growth will be available tax-free.

I’m reviewing tax returns and running tax projections for all of my ongoing (“proactive planning”) clients.  We’ll be discussing adjustments and opportunities throughout the year.

If you are not a client and would like to have someone help you with your tax planning, please contact me.