I have held off commenting much on the new GOP tax code because, frankly, it was all noise until the final bill was drafted and released to the public. That happened on Friday. So, let’s look at how it benefits you. I am going to reserve commentary on who wins, and who loses, and whether or not the bill is good for the country. After all, there are only two weeks left in the year, so it is much too important to focus attention on ACTIONS REQUIRED BEFORE THE END OF THE YEAR.
Many taxpayers will no longer need to itemize. This is a big (and underappreciated) deal with the new tax code. The standard deduction for singles is increasing to $13,000 and for couples is going up to $24,000. So, what does this mean to you?
Will YOU need to itemize? The answer may surprise you, particularly if you have been itemizing your taxes for your entire life. But the tax law changes the equation significantly. Here is how you do the math:
Add up the total amount of all your deductions on your last tax return (mortgage interest, charitable donations, etc.) but only use the lesser of your actual state and local taxes, or $10,000.
Now subtract out any “miscellaneous deductions” which included your investment management fees (sad), your accountant’s fees, unreimbursed business expenses, etc. These are the expenses which need to add up to more than 2% of your Adjusted Gross Income before you could start deducting them. They have been summarily eliminated in the new tax bill.
What you are left with (for most people) is an estimate of the deductions you will have available to you under the new law. For example, let’s say these are your deductions:
Mortgage Interest: $8,000
State Income Tax: $5,000
Property Tax: $12,000
But since you can now only deduct a maximum of $10,000 for State and Local Income taxes, your total allowable deductions under the new law will be $7,000 less, or $22,000. Since your total deductions are less than the standard deduction – you will not need to itemize.
What Should You Do NOW!
It is almost the end of the year, so there is precious little time to act, but there are some actions you can still take to save a lot of money!
If you are itemizing in 2017, but won’t be itemizing in 2018, it might make sense to MOVE AS MANY DEDUCTIONS AS POSSIBLE INTO THIS YEAR. Remember, the deductions will be useless next year – so take them NOW. Here are a few ideas:
- Pay your next mortgage payment (or two, or…) early. Be sure to tell the mortgage company you are paying your NEXT PAYMENT, or they may apply extra to principle, which would not be deductible.
- Make next year’s charitable donations this year.
- Even better…if you have the ability, and if this year’s income is high enough to warrant it, why not make a big donation to a donor advised fund, which qualifies for a deduction today, but can be distributed to qualified charities in the future.
- Prepay property taxes this year. If you can itemize this year, but won’t be itemizing next year, then regardless of the size of your tax bill, it makes sense to prepay as much tax as you can in 2017.
What EVERYONE who itemizes in 2017 should Consider doing NOW!
Even if you will still be itemizing under the new law:
- Prepay your property taxes. If your combined total state income tax and property tax bill for 2018 will be over $10,000, you should consider prepaying some of your property taxes in 2017 – even if you will be itemizing next year. Apparently, you are not allowed to prepay your 2018 income taxes under the new law, but property taxes are ok.
- Pay Your Investment Advisor in advance. And your accountant, and all your unreimbursed business expenses. Yes, indeed, it appears that all these “miscellaneous expenses” are going away, so as long as they will add up to more than 2% of your income, we suggest piling as many as you can into 2017. (note: investment advisory fees are only deductible when paid from a taxable account. Fees paid from an IRA are not deductible).
Details as always depend on your personal situation. Some taxpayers who will itemize next year may still benefit from moving deductions such as charity forward, since they may be in a lower marginal tax bracket under the new law, making the deduction worth more in 2017 than it will be worth in 2018.
Don’t wait until January to contact your tax professional! It will be too late!
We would also encourage Financial Pathways clients to call Luba or myself ASAP for a quick review of how the tax bill may impact you, and what you can do to optimize your own financial planning under the new rules.