For the last two months our Private Client Group has been focused on year-end tax planning. Our team has performed dozens of tax projections and have found several items about the new tax law that don’t seem to be getting much attention. To do this analysis we have been taking our client’s current year tax projections and placing those numbers into the 2017 tax year, showing the results side-by-side. This allows us to understand how each client is being impacted by the new tax law (what their taxes would have been had they earned 2018 income in the 2017 tax year). Below are the top three findings from our client work:
- Even if the standard deduction is greater than itemized deductions you may not want to take it– (warning, this gets a little complex). Under the old tax law, you typically always took the GREATER of the standard deduction (an amount dictated by the IRS) or all your itemized deductions (total of all allowable deductions like mortgage interest, charitable, state taxes, etc), since those deductions directly reduce your income. In the new tax law, the standard deduction is essentially doubled and some itemized deductions are curtailed or eliminated. The result is many more people will take the standard deduction in 2018. Here’s the issue with that strategy. Many states require you to use the same method (Standard or Itemized) on your Federal return as your state return. Tax payers in 2018 are going to need to understand that taking the standard deduction may create a lower tax bill on their Federal return, but a higher tax bill for their State return (most states didn’t change their tax law, so their standard deduction is essentially the same as it was). The key will be understanding what creates the lowest COMBINED tax bill. We almost never saw this issue in the past, but it is fairly common now with the new law.
- Not everyone is getting a tax cut- we have found two classes of clients are often seeing a tax increase. First, clients with very low income and high assets often are seeing tax increases. Most of these clients are newly retired, not yet receiving Social Security or taking money from their retirement accounts. They lose the miscellaneous business deductions (which includes investment management fees) which can be substantial. Also, they are capped on real estate and state income taxes which is often impactful if they own a large home or multiple properties. The losses of their deductions does not overcome the lower brackets, so we have seen several clients paying more on this end of the spectrum. The second group of clients paying higher taxes are extremely high income clients (over $1MM) in high tax states. The capping of state income taxes from itemized deductions is significant for many clients in states like California, Maryland, and New Jersey. We have come across several clients in these states who are paying more in taxes now than they were under the old tax law.
- Charitable contributions for those taking Required Minimum Distributions(RMD) needs to be reviewed- clients taking RMDs are allowed to give those distributions directly to charity, never having to realize that income on their return. Because so many clients are going to be taking the standard deduction, and not getting the benefits of itemizing (which is where charitable contributions are entered), having the IRA give contributions directly to charity almost always makes sense from tax perspective. At a minimum it is tax neutral compared to writing a check directly. At best, it allows you to continue to get your same deduction (standard) while not realizing the income from your RMD.
If this seems pretty complex, you’re right. Tax planning involves understanding how the tax code works and applying it in your favor. If you wait until next year when all your tax forms start arriving in the mail, it’s too late! If you aren’t sure if you are getting the advice you need from that standpoint, feel free to give us a call.
Greenspring Advisors does not prepare tax returns and you should obtain tax advice from your accountant before you implement any strategies mentioned above.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.