January 23, 2018
MBAF's Gary DuBoff answers key questions about the new tax law with Consumer Reports.
If there was ever a good time to work more closely with your tax preparer, this might be the year. There’s plenty to discuss, from how best to complete your 2017 tax return to how to plan for the new federal tax law, which will affect your 2018 taxes.
Because not all the regulations of the tax law have been completed, there will probably be more changes that you’ll need to know about.
“All through the year there will be updates coming out of the IRS and Treasury telling tax pros how to work with clients to implement this law,” says Chuck O’Toole, editor of Tax Notes, a tax news organization that focuses on tax professionals. “If your taxes are at all complicated, you’ll want someone to walk through them with you.”
Here are some questions you may want to run by your tax preparer:
How Will My Taxes Change in 2018?
The short answer is that for 70 percent of Americans who take the standard deduction, the tax bill probably will go down. Your tax preparer can give you a better idea of how much.
The 185-page Tax Cuts and Jobs Act creates more generous tax brackets and rates than in the past. It also almost doubles the standard deduction; it’s now $12,000 for singles and $24,000 for married people filing jointly.
If you have kids, your child tax credit will double to $2,000 for every dependent child in your household who is under age 17. (You can’t claim the credit for 17-year-olds, or for kids who turn 17 some time during the tax year.) Parents with higher incomes than in the past can now take advantage of this credit.
But while the new law is more generous in many ways, it also eliminates the personal exemption, which at $4,050 per person offered a big tax break to larger families. If you have itemized in the past, you’ll lose a lot of deductions. Your preparer can put all these factors together to determine whether you’ll be better off.
Also, if you’ve been paying the alternative minimum tax, fewer people will be subject to it starting in 2018. Your tax preparer can help you to figure out how this will affect your tax payment.
Will I Need to Adjust My Withholding Allowances?
You can expect to see changes in your paycheck by mid- to late February, as employers adjust your take-home pay to reflect the new tax law. Many taxpayers will see less tax withheld than under the prior law.
Even with that bounce in your take-home pay, it’s wise to carefully re-evaluate your tax situation under the new law with your preparer and file a revised W-4 if necessary, says Jeff Fosselman, a CPA and senior wealth adviser with Relative Value Partners in Northbrook, Ill. The IRS will release a new tax withholding Form W-4, reflecting the new law, by the end of February.
Reviewing your W-4 is key because your 2018 withholdings will continue to reflect the number of personal exemptions you chose for 2017. Personal exemptions were repealed by the new law. Continuing to rely on a 2017 Form W-4 in 2018 could mean that your employer underwithholds your federal tax, says Pete Isberg, vice president of government relations at ADP, a human-resources-services company based in Roseland, N.J. “That could mean an unexpectedly high tax bill come April 2019,” he warns.
How Much Should I Pay in Quarterly Taxes?
If you file quarterly taxes because you are self-employed or are a retiree with significant income, you can protect yourself from penalties by overpaying in the first and second quarter, says Gary DuBoff, a principal in the tax and accounting department at MBAF, a public accounting firm based in New York City.
The IRS’ “safe harbor” rule says that if you pay 110 percent of last year’s tax—or 90 percent of your projected tax for 2018—you’ll be protected from penalties for not paying enough tax.
Don’t worry about forking over too much to the IRS. “You always can go back later in the year and adjust on your third or fourth-quarter payments,” DuBoff says.
What Deductions Can I Still Take for 2018?
About 44 million individual tax returns are itemized, representing about 30 percent of U.S. households. But because the new tax law eliminates most itemized deductions, that percentage could drop to 10 percent.
If you have itemized in the past, it still may make sense for you to itemize for 2017. But the new tax law, which eliminates a lot of tax write-offs, may make itemizing less valuable for you in 2018. And for the tax breaks that remain, the amount you can deduct has changed. A few examples:
- The amount that you can deduct for payment of state and local taxes—including real-estate taxes—will be limited to $10,000 per year. In the past, taxpayers were limited in how much they could deduct in state and local taxes only when their adjusted gross incomes exceeded $313,800 for married couples and $261,500 for single people.
- If you have a mortgage, interest will be deductible on only up to $750,000 in debt.
- If you or a family member were considering a major, discretionary medical purchase—such as a set of new hearing aids—or if you were considering making home improvements to accommodate a disability, the timing of these expenses will matter. For tax years 2017 and 2018, you’ll be able to deduct these expenses to the extent that they exceed 7.5 percent of your adjusted gross income; after that, you can deduct only the expenses that exceed 10 percent of your adjusted gross income.
If it’s not clear whether you’ll benefit more from the standard deduction or from itemizing in 2018, your tax preparer may be able to give advice on steps you can take.
“Going forward, a strategy might be to bunch up your deductions in one year to itemize, and making as few of those expenditures as possible the following year to take the standard deduction,” DuBoff says. For instance, you could double your charitable donations in one year and itemize, then make no donations the following year.
How Will the New Tax Law Change the Way I Save for My Kids’ Education?
While funds from tax-advantaged 529 education savings plans have been used in the past to finance college education, they can now also be used toward paying for the cost of a private school education from kindergarten through 12th grade. Any individual can contribute up to $15,000 per year, or $30,000 per year for a couple, and avoid paying gift tax.
If you have relatives with disabilities, talk to your preparer about the new ability to transfer funds, tax-free, from 529 plans into tax-advantaged ABLE accounts. If, for instance, you have unused funds from one child’s 529 plan, up to $15,000 can now be transferred each year to another child’s ABLE account without penalty. (Low-income, disabled savers also can now qualify for the Savers Credit when they make qualified contributions directly to ABLE accounts.)
However, some other education-related tax breaks have changed. The deduction for tuition and fees, for example, worth up to $4,000, has been eliminated. Check with your preparer about the impact on your education savings and financing strategies.
How Will the New Tax Law Change the Way I Manage My Retirement Money?
If you’re a retiree and no longer itemizing because of the new tax law, there are still ways you can reduce your total tax bill. Arrange to have all or part of your required minimum IRA distribution contributed directly to a charity and not to your bank account, says Howard Hook, a CPA and certified financial planner at EKS Associates, a wealth management company in Princeton, N.J. That type of transfer, called a qualified charitable distribution, ensures that your IRA distribution isn’t added to your taxable income, saving you money.
The new law also places limits on Roth IRA “conversions”—that is, when investors convert their traditional IRAs to Roth IRAs, paying the tax on gains now in order to avoid paying tax later in life. In the past, you’ve had the option of making this change and then reversing it if your tax situation changed. Now, a Roth conversion is irreversible. So a tax professional’s advice on this gambit could be important to you.
We’re Thinking of Getting Divorced. Do We Need to Hurry Up and Do It?
The new tax law eliminates the deductibility of alimony payments on divorces that are finalized after 2018. Alimony on existing divorce decrees can still be deducted.
Given that change, it could make sense to move forward with a divorce this year, rather than waiting.
“From a negotiation standpoint, the law is definitely going to have an impact,” says Laura Roach, a matrimonial attorney and mediator based in Frisco, Texas. “There will be less people willing to pay spousal support because they won’t get the tax benefit.”
What If I Have Work Expenses That My Employer Doesn’t Reimburse?
On your 2017 tax return, you can deduct unreimbursed employee expenses, subject to certain limitations. But you won’t be able to do that in 2018, so you’ll need to figure out how to minimize those costs. “If you can figure out how to negotiate with your employer to cover those expenses, you’ll be in better shape,” DuBoff says.
If your employer offers an expense-reimbursement program, hop onboard, says Jay Shulman, CPA and principal of J.T. Shulman and Co., based in Carle Place, N.Y. The best kind is known as a “fully accountable” program, in which all work expenses you’ve paid for, including travel, entertainment, technology, and subscriptions, will be covered by your company.
If I Own a Business, How Can I Take Advantage of New, Lower Business Taxes?
If you file Schedule C, for business income, there are new rules that apply to so-called “pass-through entities” that could be beneficial to you.
If your business is a sole proprietorship, partnership, limited liability corporation, or other eligible structure, you may be able to exclude 20 percent of your business income from taxation.
“This is going to be the major change for most businesspeople,” says Brian Kristiansen, a CPA and partner at Friedman, an accounting firm headquartered in New York.
But not every small business qualifies, Kristiansen says. “It depends, in part, on the type of business you have, and whether you receive ‘reasonable compensation.'”
Keep in mind, though, that the IRS has yet to put out detailed regulations on this issue.
What Else Can I Do to Minimize My 2017 Taxes?
Depending on your income, you can still contribute to a traditional IRA and take a deduction, lowering your adjusted gross income. You also could help a low-income family member by contributing to her IRA; doing so could make her eligible for the Saver’s Credit, worth up to $2,000.
If you own a small business, a tax professional can tell you, for instance, how much you can contribute to a self-employed (SEP) IRA for 2017, offsetting your taxes.
A good reason to take these steps in 2017, DuBoff says, is that self-employed people in particular will want to minimize their 2017 taxes because they’ll be basing their 2018 quarterly income taxes on that sum. “We want to make sure the client isn’t underpaying or overpaying,” DuBoff says.
Click here to read the article on the Consumer Reports.