5 Ways to Hack the New Tax Law
Now that tax season has arrived, you’re likely digging through receipts and tax forms to pull together your 2017 returns — and your 2018 taxes may be the furthest thing from your mind. But it’s not too early to think ahead, thanks to big changes in the new federal tax bill.
Signed into law in December, the Tax Cuts and Jobs Act bill was promoted by President Trump as making the tax code so simple taxpayers could file their returns on a postcard. Tax experts say that’s unlikely.
More of a certainty is that the new law will affect millions of taxpayers in 2018, when most of the provisions kick in. Planning now can help you sidestep some pitfalls while maximizing your returns next year.
“The new tax law is over 600 pages, and understanding how it will impact you will be very important,” said Colleen Carcone, director of wealth-planning strategies at financial services organization TIAA.
One major change: The standard deduction is almost doubled for single and married filers, rising to $12,000 and $24,000, respectively. Fewer taxpayers are expected to itemize because of the higher threshold, yet this is where a tax professional can help you assess whether you are likely to continue to itemize.
Update your withholding allowances
As early as possible in 2018, check your W-4, which is a form that tells your employer how much to withhold in taxes. The reason? The new tax law eliminates personal exemptions. Neglecting to adjust your exemptions could result in your employer failing to withhold enough from your 2018 paychecks. “You could possibly owe instead of getting a refund” in 2019, Greene-Lewis noted.
Plan big medical treatments for 2018
One new break in the tax bill is a tweak to the medical expense deduction. Taxpayers who spend more than 7.5% of their adjusted gross income in either 2017 or 2018 on medical expenses will be able to deduct those costs. That's lower than the previous 10% threshold.
“Maybe you’ve been putting off some sort of medical treatment. Go ahead and make that appointment,” said TIAA’s Carcone. She added that taxpayers could be surprised at what types of expenses they can deduct, such as travel costs to visit a medical specialist. Elective cosmetic procedures are not covered, however.
Pay for private education
The tax bill expanded 529 plans to let families pay for private school tuition from kindergarten through 12th grade as well as college. One caveat is that personal annual spending is capped at $10,000 per year.
The plans are considered tax-advantaged because withdrawals are tax-free, but the money invested into them isn’t tax deductible on your federal returns. However, almost three dozen states also offer a tax deduction or credit when families invest in the plans. Savingforcollege.com provides details about 529 plans, which are administered by states.
Plan your charitable donations
Despite the larger standard deduction, there are a few methods for maximizing your donations.
Consider a donor-advised fund, a charitable investment fund that directs donations toward a taxpayer’s favorite charities. The hitch: The firms that manage them — such as Fidelity or Schwab — typically have a $5,000 investment minimum.
“If you are dancing on the line of the new standard deduction, you can make several years of gifts to a donor-advised fund this year” because those contributions lower your taxable income in the year you make the donation, TIAA’s Carcone said.
And don’t forget an important tax break for seniors. If you are older than 70½ , you can still make direct charitable contributions from your IRA. The tax bill didn’t touch that provision, Carcone said.
Reassess your home-equity loan
Under prior tax law, homeowners could deduct the interest they paid on their home-equity loans (HELOC), no matter what they used the loan for. No longer. The tax bill now limits the deduction to “acquisition indebtedness.” That means interest on HELOCs that are used to buy, build or renovate homes is still deductible. But homeowners who used their HELOCs to pay down other types of debt or buy a boat might want to reassess their loan.
“If you have cash or other investments, you may wish to pay it off,” Carcone noted. “This is where you will want to work with a financial adviser” to examine the pros and cons.
By Aimee Picchi, Special for USA Today