7 Questions to Shape Your 2019 Tax Strategy

As the holiday season approaches, chances are taxes are the last thing on your mind. But April and tax filing deadlines will be here soon. And if there’s one thing the 2018 changes in the tax code can tell us, it’s that the party’s over for many of the deductions you may be accustomed to. A new tax strategy may be just the resolution you need for New Year’s Day 2019.

Ask questions today – avoid problems tomorrow.

Upper income individuals receive significant tax cuts under the Tax Cuts and Jobs Bill (TCJA) that recently passed. But middle class families and individuals may see their tax burden increase. These changes may impact your long-term financial goals. So it’s crucial to understand your risks and reduce their impact. It’s been 30 years since there has been a significant tax reform, and chances are you’ll have questions. 2018 is a good time to consult a tax or financial advisor, as these changes are new to everyone.

We’ve laid out a few questions related to personal income taxes; they don’t address changes that would pertain to small business owners. With some care and planning you’ll weather the new laws and safeguard your future.

1. How will the increased standard deduction affect me?

The Tax Cuts and Jobs Act (TCJA) doubles the standard deduction. But it also reduces the number of taxpayers itemizing deductions. That means no longer being able to claim a deduction for property taxes, mortgage interest, charitable contributions, etc. These changes may influence your decisions about paying off your mortgage, or your charitable donations.

2. What changes impact current or future fixed-income strategies?

It’s always been important to consider how tax changes impact your retirement accounts, especially if you’re living on a fixed income. 2017 marked a time when one key strategy for your individual retirement account disappeared for good. The TCJA passed last year eliminated the ability to reverse an IRA conversion in 2018 and beyond.

3. Does the $10,000 cap on property and local taxes affect me?

The TCJA caps state and local taxes. For taxpayers living in states with high state income taxes, this is a very big change — the deductibility of those taxes is now limited. This change also disproportionately affects taxpayers living where there are high property values. Ask your tax advisor how these changes will affect your situation.

4. Do I qualify for the child or qualifying dependent tax credit?

The TCJA removed personal exemptions from the tax code but did increase the number of taxpayers who qualify for the child tax credit. In addition, it doubled the amount of the credit from $1,000 per child to $2,000. In 2018 the income phase-out threshold has also been increased to $400,000. The dollar for dollar credit can be offset against your tax liability.

5. How will the increased estate tax exemption affect me?

The amount that a married couple can gift or leave to heirs doubled from $11.2MM to $22.4MM in 2018. The number of estates subject to the Federal estate tax is now estimated to be fewer than 5,000 estates per year. Important: these changes to Federal estate taxes have no impact on state estate and gift taxes. State estate taxes vary from state to state; estates will still be subject to these taxes, it’s important to discuss this topic with your tax advisor.

6. What about changes in asset location as a management tool?

The TCJA impacts strategies concerning asset location such as placing bonds, multi-asset funds, and actively traded strategies, etc., inside tax-deferred vehicles, and placing tax sensitive equities and municipal bonds in taxable accounts, etc. It’s very important now to examine how you locate income and savings, between personal and business income, and between pre-tax tax-deferred, after-tax taxable, and after-tax tax-free savings over the next few years. The decisions you make could result in more than a 20% difference in your ROI in the long run.

7. What about changes that affect charitable giving?

With the standard deduction being doubled, it might make sense to look at strategies designed to maximize your giving. The owner of a retirement account will not report the amount distributed to the charity on their income taxes. Donor-advised funds are also expected to gain in popularity. These funds allow taxpayers to lump several years’ worth of giving into one tax year, so funds are distributed over time.

These questions will help you plan your tax strategy, and they’re great to go over with your financial advisor!