Tax season is over but it’s hardly business as usual because the Tax Cuts and Jobs Acts is now live. This new law brings several changes for tax payers, and, as always, there are winners and losers. In addition to the new changes, tax payers should look for ways to reduce, eliminate, or defer their tax liability.
Here are a few of the changes for 2018 and beyond from the IRS website.
- Limiting deductions for state and local taxes. It now stands at $10,000.
- Limiting the deduction for home mortgage interest. The deduction for interest payments is now limited to loan balances of $750,000 or less.
- The interest deduction for a line-of-credit is still intact if the proceeds of the loan are used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”
- If you use a line-of-credit to purchase a vacation home, and the loan is backed by your primary residence, then the interest isn’t deductible. However, if the loan is secured by the vacation property and your total loan balances for your two homes falls below $750,000, then the interest is deductible.
- Deductions are no longer available for employee business expenses, tax preparation fees and investment expenses, including investment management fees.
- The standard deduction has almost doubled. It jumped from $13,000 to $24,000 for married couples and it climbed to $12,000 from $6,500 for single filers.
- The estate tax exemption did double. The exemption for a married couple is $22.4 million while the individual’s is $11.2 million.
- The child tax credit is now $2,000 per child for those under the age of 17.
- The income threshold has been raised for those individuals wanting to contribute to an IRA.
The tried and true methods for reducing your taxes are still in force. Here are a few suggestions to help you keep more money in your pocket.
- Max out your 401(k) or company retirement plan. The threshold for a contribution to a 401(k) plan is now $18,500 if you’re under 50; $24,500 if over 50.
- Contribute to an IRA. Regardless of your income or tax bracket you can contribute to an IRA. You may not qualify for a tax deduction, but you’ll benefit from tax-deferred or tax-free growth.
- Invest in municipal bonds. These bonds generate tax-free income and if you live in a high-tax state like California or New York they’re almost a must.
- Establish a donor-advised fund. You’ll receive a tax deduction for your contribution and then you can distribute your money as you see fit.
- With the rise in interest rates and increased stock market volatility it’s possible you may have an unrealized loss or two. Selling a losing investment and transferring the proceeds to a new one could benefit your tax situation.
The final item to check is your paycheck. The new tax law should benefit your take home pay. To make sure your receiving your fair share plug in your data to a W4 calculator. Here’s a link to the IRS website W4 calculator: https://www.irs.gov/individuals/irs-withholding-calculator.
Last, the new tax bill is about 600 pages in length, so I’d recommend consulting a good CPA to help you navigate the fine print because as Tom Waits said, “The big print giveth and the small print taketh away.”
Happy tax planning!
May 23, 2018
Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM does not provide tax advice so please consult your accountant, CPA or EA.