At the beginning of the year, there was a flurry of articles created by every known publisher of tax and financial media discussing the new tax laws, the changes involved, and the possible impact on people. Even though these initial articles are interesting and can help put context to such a significant change, I think the more valuable work only begins at this point.
The following are a few activities we will take during 2018 to identify the impact of the new tax laws on each client’s situation.
For those earning wage income, we will be analyzing their pay statement and calculating their withholding based on the new tax tables. The benefit of this exercise is that it will allow us to see if any significant change in their take-home pay has occurred; and if so, we can strategize how to capture the change to the client’s advantage.
We will further expand our analysis with a pro-forma tax projection for 2018. This will take into account changes to Standard Deduction levels, Exemption elimination, Tax Bracket changes, Itemized Deduction increases, Property and State Income tax deduction limits, and more. An overall look will allow us to identify opportunities to be tax efficient or to flag any issues. One opportunity – bunching deductions (see below). One issue to flag – the rules for deductibility of interest on a home equity line of credit have changed.
The new tax law moved the Standard Deduction for Single Filers to $12,000 and Married, Filing Joint Filers to $24,000. This change may limit the deductibility of charitable contributions in a year, so we will be identifying opportunities to bunch contributions into one year that otherwise would have occurred in two or three. It’s not a no-brainer for everyone but can be valuable for some.
Adjust for the Increase in the Maximum Tax Qualified Deferral
If you find your taxes are lower in 2018 due to the changes in the law, why not apply that money to your retirement plan savings? You didn’t have this money in the past, so you won’t miss it if it goes straight to savings! Also, for those clients turning age 50 in 2018, we will discuss the catch-up provision to save even more.
Assess the impact of Retirement Income Distributions by Account Type
With tax brackets moving lower, it may make sense to draw earlier from one’s qualified accounts rather than wait until age 70 ½ when you have a required minimum distribution. Yes, it is advantageous for your qualified accounts to continue to add tax-deferred growth. But, it may make sense to strike a balance and take some before age 70 ½ to avoid a distribution level that pushes you to a higher tax bracket in later years.
Everyone’s situation is different, and that is why tax planning is an integral part of financial planning. The activities discussed above are not the only ones to do, but they can help you anticipate and adapt your plan during this year of change.
Author: David Jeter, CFP® | Partner and Financial Advisor | Allegheny Financial Group | March 2018
The information included herein was obtained from sources which we believe reliable.
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.