Tax Changes & Planning -- Individuals
With the end of the year approaching, it’s a great time to look at your current tax strategies to make sure they are still meeting your needs going into the new year and to also take any last-minute steps that could potentially lower your current and future tax bill. In this article we will discuss the major changes that happened in 2017 with the Tax Cuts and Jobs Act (TCJA) for individuals that may impact your current tax situation as well as tax planning strategies to implement for this year and the next.
Major tcja Law Changes for Individuals
Changes were effective for the 2018 tax year and are also impacting 2019 and future years:
Lower income tax rates
A larger standard deduction
limited itemized deductions
No personal exemptions
An increased child tax credit
A watered-down alternative minimum tax (AMT)
These changes impact many areas of individual taxation for better and for worse. You may have already noticed a few of these while reviewing your 2018 tax return, but it is important to understand the changes, so you know how to reduce your current and future tax bill. The TCJA lowered the tax rate at each income bracket – please see Table 1 at the end of this article for reference. The TCJA also made changes to the rules for the itemized deductions – the most notable being that your deduction for all state and local taxes paid, including property taxes, are limited to $10,000. The TCJA also eliminated personal exemptions, but nearly doubled the standard deduction and child tax credit. The child tax credit is $2,000 per child, and $500 per qualifying dependent. Lastly, the TCJA increased the income limits for AMT, so you will be less likely to have AMT tax this year. These changes are still in effect for 2019.
Take these changes into consideration
in your tax planning
Now that we know the changes, let’s see how we can plan around them. Individuals have many options for tax planning and may vary based on each person’s tax situation and their preferences. There are many factors to consider in tax planning such as filing status, your income this year, projected income for next year, and the timing/eligibility of your deductions. In the rest of this article we will briefly discuss five planning strategies that may be beneficial:
Defer income and accelerate deductions
Retirement contributions and withdrawals
Bunching itemized deductions
FSA or HSA contributions
Gift tax exclusion
Defer Income and Accelerate Deductions
In certain situations, you may be able to defer income into 2020 and accelerate your deductions for 2019. This would lower the income reported on your tax return for 2019 and may allow you to take deductions and credits you would not qualify for with a higher taxable income. For example, IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest are partly disallowed depending on your AGI or taxable income for the year.
Retirement Contributions and Withdrawals
When it comes to retirement, a key factor is the timing of paying taxes. Taxpayers can deduct contributions they make to traditional 401k and IRA accounts but cannot deduct contributions to Roth 401k and IRA accounts. These two types of accounts work in the exact opposite way. You are not taxed on the income you contribute to traditional accounts, but you pay taxes on it and any earnings when you withdraw it. Conversely, you are taxed on the income you contribute to Roth accounts, but you do not pay taxes on that income when you withdraw it – you only pay taxes on the earnings. For taxpayers who are straddling the line between a lower and higher tax bracket, it may be worth it to make contributions to a traditional account to stay in that lower bracket. For taxpayers who are in a low bracket and expect to be in a higher bracket when they retire, it may be more beneficial to make contributions to a Roth account and pay those taxes now while in that lower bracket.
Bunching Itemized Deductions
The standard deduction has increased to $24,400 for married taxpayers filing jointly and $12,200 for single taxpayers for 2019, making it harder for individuals to itemize their deductions. The TCJA has limited the state and local tax deduction to $10,000 and eliminated miscellaneous itemized deductions, leaving medical expenses and charitable contributions the best options for tax planning. If you know that you will be able to itemize this year and not next year, or vice versa, it may be beneficial to push all the medical expenses and charitable donations you make into one year. For example, it will be more beneficial to make two years’ worth of charitable contributions in 2020 as opposed to making smaller donations throughout 2019 and 2020 to help ensure you will get a deduction for your qualified expenses. If you make smaller donations over a two-year period, they may not be enough in total to allow you to itemize your deductions.
FSA or HSA Contributions
If your employer offers healthcare paired with a Flexible Spending Account (FSA), it may be beneficial to increase the amount you set aside for next year. Contributions to an FSA account decrease the taxable income reported on your Form W-2. These contributions are made through paycheck withholdings and may be adjusted to ensure you are withholding the maximum amount. For 2019, you may contribute $2,700 to an FSA.
If your employer offers healthcare paired with a Health Savings Account (HSA), it may be beneficial to contribute the maximum allowed. Contributions to HSA accounts reduce your taxable income and help you get into a lower tax bracket if you are close to being in a higher bracket. For 2019, you may contribute $3,500 for individual coverage plans and $7,000 for family coverage plans. If you become eligible this December to participate in your company’s HSA, you can make a year’s worth of deductible contributions for 2019.
GIFT TAX EXCLUSION
If you are interested in long-term tax planning for your future estate or have assets you would like to give to a loved one, it may be beneficial to gift these assets this year and use the gift tax exclusion. For 2019, you may gift someone $15,000 and not pay any taxes on it. If you give a gift greater than $15,000, you must file a gift tax return and pay taxes on the excess over the limit.
These are just a few of the many tax strategies that may be beneficial for your current situation. Tax planning is an ongoing and proactive process that should be addressed every year or few years depending on how often your situation changes. There are many more factors not addressed in this article that may change how these strategies would apply to your individual taxes.
If you would like for us to assist you in your current and future tax planning, please contact one of our tax professionals at (225) 927-6811. We are passionate to serve you as your trusted business advisors and look forward to hearing from you.
