Tax Reform: the More You Plan, the More You Save!

By Pooja Srivastava

In December 2017, the Trump administration made amendments to the tax law that will change your tax return for the next few years. If you plan well, subtle changes can help you save and get a good refund. In this article, we cover some of the most important changes to the tax code.

How to Plan for Tax Changes in Family Deductions

The Trump Administration’s Tax Cuts and Jobs Act (TCJA) will impact certain deductions and credits you can take for yourself and your family. While the dependent and personal exemption has dropped, TCJA increases standard deductions and child tax credits.

One major change is that taxpayers will no longer be able to deduct alimony payments for divorces finalized in 2019. Careful planning is important to qualify for tax relief for divorces finalized before 2019.

 

Family Deductions and Credits

How They’re Changing

How to Plan

Alimony Payments

No longer deductible for divorces finalized after December 31, 2018

If your divorce was made pre-2019, there are specific requirements to qualify for the deduction.

Dependent/
Personal Exemption

Reduced from $4050 per person on your tax return to $0

Dependent Credit for Caregivers

New credit for those who take care of elderly parents and disabled kids $500

Remember to take this deduction if you qualify, with supporting documentation.

Child Tax Credit

Doubled from $1,000 to $2,000 per child

Standard

More than doubled to $12,000 for single, $24,000 to married filing jointly

Your state may or may not comply with federal tax laws. For example, California does not comply with most of TCJA guidelines. Plan accordingly.

 

Tax Changes for Personal Assets and Donations

Homeowners should note that deductions on mortgage interest and State and Local Tax (SALT) are capped at new limits. Additionally, the electric car credit is unchanged, but Tesla cars will no longer be eligible after 2019. Estate taxes will allow for larger untaxed transfers of property and wealth.

An increased cap on Alternative Minimum Tax (AMT) will benefit those with employee stock options.

While the deduction for donations remains the same, a higher standard deduction might impact your giving.

 

Deductions and Credits

How They’re Changing

How to Plan

Mortgage Interest

Capped at $750,000 for a primary residence

For those in pricier counties who want to make investments and move between mortgages, this leaves room for tax planning. However, all states don’t comply.

Deductions on rental properties are not subject to this limitation.

State and Local Tax (SALT) on your Home

Limited to $10,000

Electric Car Credit

The Tesla credit is over in 2019

The maximum credit for other electric cars is still $7,500, but credit differs by model, make and battery capacity

 

Estate Taxes

Moved to a higher bracket; No tax on transfer of property or assets to friends and family for up to $11.2 million

If you are saving for your kids’ future, your retirement, an inheritance, or unforeseen events, GST and other taxes necessitate planning.

 

Alternative Minimum Tax (AMT)

Cap has lifted from $84,500 to $109,400

Positive development for those with employee stock options. Tax planning is important for early stock vesting RSU & ESPP shares.

401K

Annual contribution limit increases from $18,000 to $18,500 (per individual pre-tax).

Traditional IRA and Roth IRA

Changed to $6,000 ($7,000 for ages 50+) depending on your compensation for dollar limit. (Per individual pre-tax in case of Traditional IRA, and post-tax in case of Roth IRA)

Roth re-characterization under the new rules is not allowed. Plan accordingly.

Donations

Deductions remain the same, but filers should plan based on other changes

Due to the increase in the standard deduction, charitable contributions must be substantial enough to reduce income

 

Other Changes to the Tax Code

Parents will be delighted that they can save money on educational expenses for K-12 grades, using a 529 plan.

There is no longer a penalty for not having health insurance.

General Tax Changes

How They’re Changing

How to Plan

529 Savings Plan

Parents may now pay for child’s tuition from 529 plans or estates, including K-12

Important to secure a 529 plan to take advantage of these savings

Healthcare Penalty

Obamacare is still in place, but the penalty for not having health insurance has ended

 

The Importance of Tax Planning

There are many small changes to the tax code, and they all impact your bottom line. An experienced tax consultant will investigate your financials carefully to get you the maximum tax benefit. Talk to your Chugh CPAs, LLP tax professional to develop a strong plan for 2019 – and save.