Who are the winners and losers under the new tax law, and where do you fit in?
You may be in for fewer tax breaks under the new law. But there’s a lot more to the story.
“It will be a wild year,” admits Thomas Giunta, tax expert who owns Farmington-based Thomas M. Giunta Tax Service. Tax reform passed last year makes 2018 the first year the overhaul could impact your wallet. Whether you win or lose compared to your IRS tax filing under the old rules depends on a slew of factors.
The biggest question Giunta says he is hearing: “Will I still be able to itemize?” His answer: “I don’t know.” But he quickly adds that it is important to do so for this year — ”to do the math.” Giunta said that going through the process of totaling up a range of expenses that are not otherwise tax-deductible, such as medical and dental expenses, charitable contributions and so forth, provides a comparison with the standard tax deduction (that flat amount the tax system lets you deduct). “There may be a better route to go,” he said.
“So much has changed” under the new law and “the first year of a new tax law will be work,” said Giunta. There is no one answer for how taxpayers will fare overall.
“You will hear stories on both sides,” he said. “Some will gain, some will lose, some will not see much change at all.”
The new law placed steep limits on itemized deductions and eliminated personal exemptions. It nearly doubled the standard deduction, to about $12,000 for singles and $24,000 for married couples filing jointly. When it all shakes out, this will likely result in fewer people taking itemized deductions on their 2018 returns, according to cnbc.com.
Before the tax overhaul, about 30 percent of taxpayers took itemized deductions, according to the Tax Policy Center.
Itemized deductions that are gone — or capped — from your 2018 return include: casualty and theft losses (such as damage from fire, accidents, theft and vandalism, and natural disasters); medical and dental expenses; home mortgage interest; and charitable giving.
A lot of people are talking about the new cap on your state and local tax deduction (SALT). The old rule let taxpayers include state and local property, income and sales taxes as itemized deductions. Under the new rule, taxpayers are limited to claiming an itemized deduction of $10,000 in combined state and local income, sales and property taxes, starting in 2018 through 2025.
“While taxpayers could not get around these limits by prepaying 2018 state and local income taxes while it was still 2017, the bill says nothing about prepaying 2018 property taxes,” according to magnifymoney.com.
Five things you can do by Dec. 31 to cut your tax bill include the following, provided to The Associated Press by the personal finance website NerdWallet:
1. MOVE MONEY INTO A 401(K)
Traditional 401(k)s can shield a decent chunk of your income from taxes. In 2018, you can funnel up to $18,500 ($24,500 if you’re 50 or older) of your pay into one and avoid paying taxes on that money until you withdraw the funds. If your employer offers a match on contributions, you’ll get free money to boot, and those matching dollars are on top of the $18,500 limit.
If you don’t have access to a 401(k), you may still be in luck — you may be able to shield up to $5,500 from taxes ($6,500 if you’re 50 or older) by putting the money into a traditional IRA. If you qualify, the size of the tax deduction depends on your income and whether you or your spouse is covered by a retirement plan at work. Bonus: You have until April 15, 2019, to move money into an IRA and still make it count as a 2018 contribution. (And yes, it’s possible to contribute to a 401(k) and a traditional IRA in the same year.)
2. BUNCH YOUR CHARITABLE DONATIONS
Itemizing on your taxes generally only pays off when your itemized deductions add up to more than the standard deduction (and in 2018, the standard deduction is much higher: $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers). That’s why charitable donations and other itemized deductions might not get you much of a tax break if they’re so small that you just end up taking the standard deduction instead. It’s no reason to stop giving, but you may want to tinker with the timing.
Donating one big amount instead of a series of small amounts could change the tax game, says Kerry Garner, a CPA at Patterson Hardee & Ballentine in Franklin, Tennessee. A married couple might not score a tax break from a $15,000 annual donation, for example, but bunching the donations into a $30,000 gift every other year could, he notes.
3. SELL THE LOSERS
If you made money on the sale of investments in 2018, you might have some capital gains tax to pay in April. But you might be able to offset some of those gains with losses.
“If you’ve got an event that generates a significant capital gain during 2018 — maybe that happened earlier in 2018 or sometime throughout the year — to the extent that you’ve got investment holdings that are sitting at a loss position, it makes sense to liquidate those losses during the year to offset capital gains,” explains Nicholas Shires, a CPA and tax partner at Dannible & McKee in Syracuse, New York. If your losses exceed your gains, you may be able to deduct the difference on your tax return, up to $3,000 per year ($1,500 for those married filing separately).
4. MAKE A DECISION ON THAT DIVORCE
If you’re still negotiating with your soon-to-be ex and expect to pay or receive alimony, keep an eye on the calendar. In general, for divorces finalized after Dec. 31, alimony payers will no longer be able to deduct their payments, and alimony recipients will no longer have to include that money as taxable income. “If you’re the one that’s going to be paying the alimony, you would want it to be finalized prior to December 31, 2018,” Shires says.
5. MEET YOUR TAX PREPARER
The sooner your tax preparer has an idea of how your year is shaping up, the sooner he or she can find you more ways to save. That’s especially true for people who are self-employed or have unusual sources of income, Garner notes. “I try to do it the first week of December, so it still leaves them plenty of time to actually get things done,” he says.