How the New Tax Laws Could Affect Your Planning

Advisor talking to elderly clientPicture the Tax Cuts and Jobs Act as an industrial-sized broom: it covers a huge area with just one sweep. In our previous article we discussed some of the key changes this landmark tax overhaul brings for individuals. Let’s focus now on ways the new tax laws may affect your financial planning.

Deductions are easier for some, but harder for others.

Deductions just got a whole lot easier for most people, since the new, higher standard deduction ($12,000 for individuals and $24,000 for joint filers) is more than they were able to itemize before. And really, this makes life a little easier for those taxpayers too- they can now just ignore those decisions about if an expense was tax-deductible or not.

For others, the new standard deduction is nowhere near what they were able to itemize last year, and so they are forced to pick among the itemized deductions available under the new, tougher rules. (see our article, The Top Tax Overhaul Changes for Individuals, for more details.)

Planning for the leaner itemized deduction rules may include “bunching” itemized deductions by paying two years’ worth of deductible expenses in one year and taking a larger itemized deduction. Of course, the flip side of that is there will be less to deduct in the next year. In that year, the standard deduction would be available.

IRA strategies are more important

One of the changes in the Tax Cuts and Jobs Act is the elimination of the “2% Miscellaneous Itemized Deductions”, which included the deduction for investment advisory fees. Planning for this reduction includes having IRAs and retirement accounts pay their own advisory fees, which can be done as a tax-free withdrawal.

Another important IRA strategy is the Qualified Charitable Distribution (QCD), in which an IRA owner subject to Required Minimum Distributions (over age 70 1/2) makes charitable gifts directly from their IRA.

While charitable gifts done this way cannot be taken as itemized deductions (which are now more precious than ever), they can still reduce your taxes, since those gifts (up to the $100,000 maximum) are tax-free IRA distributions that count toward the Required Minimum Distribution. This can lower your gross income, which may avoid taxes on gross income like the 3.8% Medicare Net Income Investment Income tax and the income-based surcharges on Medicare premiums.

Home Equity debt is less advantageous

Mortgage interest is still deductible under the new rules, however the deduction is restricted to $750,000 of “acquisition indebtedness.” This means that interest on home equity lines and other “home equity indebtedness” is now not deductible (though there are some exceptions for existing loans taken out before 2018). That effectively raises the cost of home equity debt.

The Stakes are higher for Roth IRA Conversions

Roth IRA Conversions are a valuable long-term tax planning strategy. However, the cost of converting IRA money to a Roth can get steep in a hurry, if you convert a little too much and end up in a higher tax bracket, or subject to another income-related tax or surcharge.

Under the new tax rules, Roth Conversions are still allowed. However, reversals of Roth Conversions can no longer be done after the end of the tax year of the conversion. So it’s now very important that you are prepared for the tax cost of a conversion when you execute the conversion.

Your tax advisor can help with this by projecting the effect of different Roth Conversion amounts, allowing you to tailor the tax impact.

Estate Planning can be simpler

Under the new tax rules, people can pass up to $11.2 million to heirs without being subject to estate tax. This means that avoiding estate tax isn’t an issue for the vast majority of people.

Of course, estate tax avoidance isn’t the only thing estate planning is needed for. It is still very important to plan for who will care for you and your finances, and for your heirs and loved ones. Estate planning is still needed- it’s just that strategies designed to reduce estate tax won’t be needed for the most families.

If your estate planning was done more than a few years ago, you should consult with your estate planning attorney to see if removing tax-avoiding provisions in your documents can make things simpler for your family.

Tax Planning is as important as ever

The new tax laws may have swept away some of the easiest short-term tax breaks people depended on. But you can still benefit from longer-term, savvy tax planning. At Blankinship & Foster, we help our clients make planning decisions with a multi-year perspective, integrating all the areas of their finances, in collaboration with all the members of your financial team.

Contact us to learn how we can help simplify and organize your finances, so you can have confidence, clarity and direction for the future.

About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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