On December 22, 2017, President Trump signed into law the most wide-sweeping tax reform of the past twenty years…The Tax Cuts & Jobs Act. Virtually every taxpayer will be affected so I interviewed one of my partners, Michael Wagner, CPA, CFP® about a couple of strategies you can implement to take advantage of the new law.
Stewart: Michael, how will our readers be impacted by the new tax law?
Michael: That is a great question. The results of a recent poll indicated that 80% of Americans did not think they will get a tax reduction under the new plan. In reality, it is actually the reverse, with nearly 80% of taxpayers paying lower taxes.
The two main aspects of the GOP tax plan that will save tax payers money are: (1) across the board lower tax brackets and, (2) the doubling of the standard deduction. The doubling of the standard deduction will not only lower an individual’s taxes, it will also simplify individual tax returns for millions of Americans. As a result, many will be able to prepare their own tax return, which will be an additional savings.
Stewart: under the new law, so many things have changed. What are some tax tips for readers to take advantage of under the new tax law?
Michael: Here are two tax tips:
If you take the Standard Deduction. The doubling of the standard deduction means that millions more taxpayers will find they’ll pay less taxes using the standard deduction versus itemizing their tax return. For these taxpayers, charitable donations will no longer be deductible. However, there is a loophole in the tax law that allows individuals who are required to take a Required Minimum Distribution (RMD) from their IRA to transfer the RMD (up to $100,000) directly to charity. By transferring this amount directly to charity, it will not be included as income on the individual’s tax return so this is a way to lower their tax while still taking the standard deduction. for example, say that this year you turned 70 ½ and will take a $20,000 distribution from your IRA as part of your RMD. If you deposit that money into your personal checking account it is taxable. If you then write a check to your favorite charity for $20,000, because you used the standard deduction form of tax filing, your gift to charity will not be deductible. So, you have to pay income tax on the $20,000 but don’t get a tax deduction for the gift. Under our strategy, you transfer your $20,000 RMD directly to the charity and avoid the income tax on the required distribution.
If you Itemize your tax return. For taxpayers who itemize their deductions the new GOP tax law caps State & Local tax deductions to $10,000. For example, if you paid $5,000 in property tax and $8,000 in State of Alabama income taxes in 2017, you would have received a $13,000 deduction on your Federal return. In 2018, that deduction would be capped at $10,000, thus you would lose $3,000 of deductions. A way to avoid losing this $3,000 deduction is to make a $4,000 contribution under the Alabama Accountability Act to a Scholarship Granting Organization. This contribution gives you a dollar-for-dollar tax credit on your state tax return (maximum tax credit equal to 50% of your Alabama tax). This $4,000 contribution recharacterizes the $8,000 State of Alabama Income tax into a $4,000 State of Alabama Income tax deduction and a $4,000 charitable deduction. Now your State and Local tax deduction is $9,000 ($5,000 property tax plus $4,000 state income tax) and you have a $4,000 charitable deduction giving you a total of $13,000.
There are only $30,000,000 of these tax credits available, so talk with your tax professional soon to claim your credit before they are gone. Scholarship for Kids website has a great step by step guide to help you claim your tax credit. http://www.scholarshipsforkids.org/library/doclib/SFK-Step-By-Step-Instructions.pdf
While one of the goals of the new tax law was simplification, it is anything but simple. Be sure to consult with your own tax advisor before acting on these comments.