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Opinion: Next steps following tax reform

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After 10 months into a post-tax-reform era under the Tax Cuts and Jobs Act of 2017, many taxpayers are still unsure of their tax situation and how tax reform will affect them. Here are some critical points to consider as we near year-end.

Sweeping changes for individuals
Extensive changes to the individual tax landscape were a centerpiece of tax reform. Most Americans should see a modest decrease in their overall tax bill due to cuts in tax rates – with the maximum rate decreased to 37 percent from 39.6 percent, and most other tax brackets adjusted, as well. 

The standard deduction amount was nearly doubled – to $24,000 for married couples and $12,000 for individuals (up from $12,700 and $6,350, respectively, under prior law). Because of this dramatic increase, it is estimated only 10 percent of Americans will itemize their deductions post tax reform. Personal exemptions were completely eliminated, however, offsetting some of the increased standard deduction’s benefits.

Several other notable changes were made to itemized deductions, including a new $10,000 deduction limit on state and local taxes paid, which will severely limit the deduction for many taxpayers. The 2 percent miscellaneous itemized deductions category, which includes unreimbursed employee expenses, tax prep fees and investment management fees, was eliminated.

Taxpayers with dependents under age 17 will surely appreciate the doubled child tax credit – a $2,000 max benefit per child.

Lumping, bunching and harvesting
In light of changes to the standard deduction, taxpayers are faced with decisions on the timing of making donations and paying for deductions.

“Lumping” itemized deductions or “bunching” charitable donations into specific time periods can help push taxpayers over the threshold for itemizing in a given year. For example, instead of making smaller annual gifts to charities, you could donate a larger amount to a donor-advised fund and receive the entire charitable deduction in one year (therefore having enough deductions to itemize). Then, in future years, take advantage of the higher standard deduction. 

For those taxpayers age 70-and-a-half who own an individual retirement account – consider making a qualified charitable distribution from IRA funds. Not only can a QCD help satisfy your required minimum distribution for the year, it also comes out of the IRA tax-free.

Harvesting capital gains or losses from investments is another popular tax-planning tool.
 
Discuss your specific needs with your investment adviser and accountant.

Withholding checkup
Are you a wage-earner? If so, now is the time to perform a checkup on your withholding amounts. Both the IRS and the Missouri Department of Revenue have adjusted their withholding tables downward due to tax reform. Even if you haven’t changed your allowances on Form W-4, there is a good chance that less tax is being withheld. No one likes a surprise at tax time, so use the IRS withholding calculator to do a paycheck checkup.

Business incentives
Tax reform brought about some welcome changes to the business tax landscape as well.

With a new flat corporate tax rate of 21 percent, many business owners are contemplating the switch from a flow-through entity to a C corporation. To even the playing field for flow-through entities, however, a new 20 percent deduction on business income was introduced under the Tax Cuts and Jobs Act, making the maximum effective tax rate only 29.6 percent. 

With extremely generous limits on 100 percent bonus depreciation and Section 179 expensing, business owners can write off most, if not all, of their asset purchases.

Death and taxes
Benjamin Franklin said there were only two things certain in life: death and taxes. While the estate tax was not repealed as we had hoped for, the lifetime estate and gift tax exclusion amount doubled to $10 million per person (adjusted annually for inflation to $11.18 million in 2018). For a married couple in 2018, that’s $22.36 million that can be shielded from estate and gift taxes.

If your estate planning or trust documents were drafted before tax reform, it’s a good idea to revisit the structure with your attorney and confirm that you will reach the desired outcome upon your death.

The bottom line is to run the numbers. Sit down with your prior-year tax return or, better yet, your accountant to compare each line item on your tax return with the changes in tax law. Should you accelerate some deductions, defer income or vice versa? Spending some time to plan for next tax season will afford you the opportunity to make any necessary changes before year-end.

Certified public accountant Kristin Carter is a tax officer for Central Trust Co. She can be reached at kristin.carter@centraltrust.net.

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