Post Tax Vote: What Every Taxpayer Should Do Today

Congress has done its work to pass its tax plan, and now it’s time for financial planners to do theirs. This is so exciting for a guy like me to be able to help my clients figure out how to keep as much of their hard-earned money as possible.

SEE ALSO: 8 Money Moves You Must Make Before 2018

The biggest thing to do right now is to figure out if you are likely to be itemizing your deductions in 2018. For most people the answer will be “NO.”

If your itemized deductions are less than the new 2018 standard deduction ($12,000 for single or $24,000 for married filing jointly) then you will be better off for tax year 2018 to take the standard deduction. If that’s new for you, then make sure to consider moving your deductible payments for 2018 to 2017 by making those payments before Dec. 29 (the last business day of the year).

So, for millions of people who used to itemize, they will have a much simpler tax return come 2018 due to the tax overhaul, which Congress approved on Wednesday, Dec. 20, 2017, and sent to President Trump to sign into law.

The main items that make up your itemized deductions include:

• State & local income tax
• Property tax
• Mortgage interest
• Charitable contributions

In 2018 and beyond, your combined state & local tax and property tax itemized deduction is limited to a TOTAL of $10,000. For people who live in states with very high property taxes and a state income tax, that’s a huge blow. Probably another reason to move to a low-tax state.

How do you know if you will keep itemizing?

How to calculate your 2018 standard deduction on the back of a napkin:

Property Tax + State & Local tax (Maximum of $10,000)

+ Mortgage interest

+ Charitable contributions

= If that totals less than your standard deduction, you would simply use the standard deduction. So SIMPLE.

On the surface that looks bad for many of us, because we are losing our larger itemized deduction amount, therefore, if your income was identical you would assume you would owe more in income tax. The reason that will not be the case for many people is that the tax rates have been lowered across the board.

Before looking at the rates and brackets; the point of doing this calculation right now is that you should consider bunching your deductions in 2017 if you won’t be able to use them in 2018!

Check out this income tax calculator for an estimate of your future income tax burden:

If after doing the calculation above you figure that you will no longer be itemizing your deductions, then you may want to find a way to make these moves before Dec. 29, 2017, to get itemized deductions for the 2017 tax year:

1. Pay your January 2018 mortgage payment (home interest deduction).
2. Prepay your 2018 property taxes.
3. Make charitable contributions.
4. Pay your 2017 fourth-quarter estimated state income tax payment, which is due in January — if you pay state quarterly estimated tax payments.

   Caveat: If you are subject to the Alternative Minimum Tax (AMT), prepaying your property and state tax may not help you as it is added back to do that calculation.

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   See Also: 4 Tax-Free Income Sources to Supplement Retirement

   Summary of Tax Cuts & Jobs Act

   Other features of H.R. 1, Tax Cuts and Jobs Act:

   • There will be a change in most of the seven tax brackets in 2018. The personal tax brackets will be as follows: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
   • The personal exemption has been eliminated as part of the trade-off for the much larger standard deduction.
   • Small-business owners who are set up as S-Corporations or Limited Liability companies and receive pass-through income via a K-1 or form 1065, will be allowed to deduct 20% of their income prior to applying the personal income tax rates up to certain qualifying income limits.
   • The corporate rate will be cut from 35% to 21%.
   • Expands the medical expense deduction for two years for filers meeting that threshold from 10% AGI to 7.5% AGI.
   • Mortgage interest will be deductible for mortgages up to $750,000 (vs. $1 million currently).
   • The alternative minimum tax is still in place, but the ceiling was raised dramatically so far fewer people will be subject to this tax.
   • 529 plan distributions can now be used tax-free for private elementary and secondary school expenses (for up to $10,000 in distributions per student each year), and includes both public, private or religious schools.
   • The child tax credit will increase from $1,000 to $2,000 per child under 17 years of age with $1,400 of the $2,000 potentially refundable. This may be the single biggest benefit to lower-income families. Many will actually receive a tax refund despite paying zero income tax.
   • Filers with dependents who do not qualify for the child tax credit will be able to claim a $500 credit for each dependent.
   • The bill also repeals the Obamacare mandate/tax penalty to purchase health insurance in 2019.

   My general observations about the tax overhaul:

   • Business tax relief was way overdue. This reduction in our corporate tax rates will help the United States to be globally competitive and encourage our businesses to stay in the U.S. and not move overseas. It could also possibly attract foreign companies to move to the U.S. Both of those prospects are good for U.S job market.
   • It’s great that tax returns will be much simpler for the masses who will no longer itemize. The exception is single people living in high property tax states, especially if they pay mortgage interest or make sizable charitable contributions. In this case, they are likely to be better off itemizing their deductions.
   • It makes more sense now to pay off your mortgage more quickly for those who will no longer be deducting their mortgage interest. I wish charitable deductions were given their own deduction line item so to continue to encourage contributions. Hopefully, people will continue to be generous with their larger take-home paychecks.
   • I do believe the economy will continue to flourish under this president and that will lead to much more tax revenue for our government. Ideally, as a guy who studied economics and follows the work of economist Milton Friedman, I would prefer the federal government cut spending if the politicians are truly concerned about not receiving enough of the people’s earned income to pay for their programs. This would address the problem with a growing federal deficit.
   • For business owners, there is a large rate reduction from 35% down to 21%. The lower tax rate should help drive a business boom in the U.S.
   • Business owners have to decide if they are better of being a C Corporation, S Corporation, LLC or partnership, and the tax consequences have now changed. This is great for CPAs as they will have plenty of work analyzing these options.
   • Lastly, I think this will encourage people to move to low-tax states, most of which are financially sound. I know the low-tax states are on my radar for my financially independent days.

   Always consult your tax adviser as regarding your specific tax strategies.

   See Also: Be Careful: RMDs and Taxes Can Undermine Your Retirement Plans

   Brad Rosley, CFP®, has been president of Fortune Financial Group (FFG) since 1996. FFG runs a virtual planning practice working with clients from all over the country. Rosley specializes in helping clients successfully navigate retirement related planning goals and construct investment portfolios to meet their personal life goals. His book "Beyond Money" made the Amazon best-seller list in the summer of 2018.

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   This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.