Individual tax planning in the TCJA environment is important. The largest tax overhaul in decades provides several opportunities for tax planning. Depending on your circumstances the new provisions could impact your income tax liability in various ways. Some of the most significant changes are discussed below.
One of the most widely discussed TCJA changes is the increase in the standard deduction amounts to $12,000 for individuals and $24,000 for married couples filing jointly. Those filing as head of household will have a $18,000 standard deduction. The increased standard deduction, along with limitations on the deduction for state and local tax is expected to decrease the number of taxpayers who itemize deductions.
TCJA places a $10,000 limit on deductions for state and local taxes (SALT). State and local taxes include income and property taxes. A taxpayer with property taxes of $12,000 and state income taxes of $15,000 loses $17,000 in deductions. (Total SALT of $27,000 will be capped at $10,000.) For taxpayers in the top tax bracket, this translates to an increase in taxes of over $6,000.
Because of the significant increase in the standard deduction and the limit on SALT deductions many taxpayers will no longer receive benefit from their charitable contributions. If the total amount of itemized deductions including charitable gifts is less than their new standard deduction, there would be no tax benefit from making the charitable contributions. Grouping charitable contributions into a single tax year or gifting appreciated assets may result in greater tax savings. Use of a donor-advised fund account is one way of grouping charitable gifts into a tax year.
The increase in the standard deduction may also limit the benefit of mortgage interest expense for taxpayers with lower mortgage debt. For example, if a married couple has a SALT deduction of $10,000, $5,000 of charitable contributions and $7,000 of mortgage interest their itemized deductions will only total $22,000, less than their $24,000 standard deduction. Under this scenario there is no tax benefit to the mortgage interest expense or the charitable contribution.
The tax benefit of mortgage interest expense for those with larger mortgages may also be limited under TCJA. For mortgages taken out after December 15, 2017 taxpayers can only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for married taxpayers filing a separate return. These limits apply to the combined loans to buy, build or substantially improve the taxpayer’s main home and second home. Home equity loan proceeds used for other purposes such as personal expenses or paying off student loans would not be deductible under the new provisions.
We have highlighted a few of the changes, but there are many more. Proper tax planning can ensure that you receive the benefits of the new tax law changes. Please Contact Us to set up an appointment to review your tax situation.