The new tax laws that took effect on January 1 are the most significant changes in over 30 years. While most Americans are beginning to enjoy the tax cuts with an increase in their net paychecks, there are opportunities to enhance your tax savings with some new strategies.
One of the most significant changes to the tax law was the dramatic increase in the standard deduction. For married taxpayers filing jointly, the standard deduction increased from $12,700 in 2017 to $24,000 for 2018. Concurrently, many items that were deductible are now limited or not deductible at all. The result is that most taxpayers that itemized their taxes for 2017 will not need to itemize beginning in 2018, thus reducing the documents and complexity of their tax return. But the new law also offers some new ways to save even more.
Let’s look at a couple with joint income of $180,000 that itemized their taxes in 2017 with the following deductions:
$10,000 mortgage interest
$2,500 home equity line interest
$7,000 state income taxes
$6,500 property taxes
$2,500 charitable contributions
Total deductions: $28,500
For 2018, assuming the same figures, this couple would not itemize. The home equity line interest would no longer be deductible and their state plus property taxes exceed the cap of $10,000 so those would not be fully deductible. The result is that their new deductions would come to $22,500, which is less than the new standard deduction of $24,000.
The tax savings opportunity comes in by shifting some deductions. Let’s assume that their winter property tax bill is $3,000 and that $2,000 of their state income taxes is paid via quarterly estimates instead of through paycheck withholding. The $2,500 in charitable contributions, at least $500 of the state estimates and the winter tax bill could be paid in December, 2018 or in early 2019. For 2018, they might take the standard deduction, but push those deductible expenses into 2019 and then accelerate the same payments into December, 2019 thus doubling the $6,000 in shift-able deductions. Instead of $22,500 each year they would have $16,500 in 2018 and $28,500 in 2019. In 2018, they would take the higher $24,000 standard deduction and not itemize, but in 2019 could itemize with $28,500 in deductions.
By itemizing in 2019 they could have an additional $4,500 in deductions, which in their new 22% federal income tax bracket would save them an additional $990 in taxes.
This is just one of many strategies to take advantage of the new tax laws. If your tax preparer doesn’t offer you this kind of proactive planning or you do your taxes yourself, you’ll want to consult an advisor that can help you navigate the new law. At Vintage, we offer this kind of strategic tax advice to our clients throughout the year.