New Tax Law: Steps You Can Take Now | Financial Planning Chapel Hill l Old Peak Financial Advisors

New Tax Law: Steps You Can Take Now

May 4, 2018


New Tax Law: Steps You Can Take Now

May 4, 2018

As of January 1, anything you make is subject to a new tax law. You may not notice it until next April 15, when you file your 2018 taxes. But there are several steps you can take now to reduce your tax bill next April.

First, several warnings. The new tax law is complex, and we are not CPAs. Also, we don’t do your taxes. There could be factors unique to you that make particular strategies inferior to others. As always, you should talk to your accountant.

But many tax payers should seriously consider three new strategies to reduce your lifetime tax burden.

“Lump” your deductions
The “standard deduction” for a married couple doubles this year from approx. $12,000 to $24,000. Most families’ itemized deductions will not exceed that amount. So, they will simply claim the standard deduction. That’s especially true because the amount of state and property tax you can deduct is now capped at $10,000 – a huge disadvantage for residents of California, New York and other high-tax states.

But if your itemized deductions in a given year are close to the $24,000 threshold, you can “lump” several years’ deductions into one year to boost your overall deductions and reduce taxable income. Here’s an example.

Imagine a married couple whose itemized deductions are $10,000 (income tax), $5,000 (mortgage interest) and $10,000 (charitable giving). Total itemize deductions are $25,000, more than the $24,000 standard deduction. In three years, they will deduct $75,000. But what if they do all their charitable giving in Year 1 ($30,000)? Their deduction for tax will be $45,000 in Year 1 and $24,000 in Years 2 and 3, using the standard deduction. That’s a total deduction of $93,000. So, they just reduced their taxable income over 3 years by $18,000.

Some filers can use a similar strategy with property and state income tax, if your annual total is less than $10,000. Within limits, you can pre-pay those taxes in the year when you want to itemize, instead of in the year when you will take a standard deduction.

Open a “donor-advised” fund
Lumping deductions may not be optimal if you want to be a consistent giver to your preferred non-profits. The solution: open a “donor-advised” fund. All the large brokerage firms offer these funds, as do many community-based groups. You open an account in the name of the fund. Any contributions to the donor-advised fund get a tax break the year you contribute.

But you can then give money from the fund to the charity of your choice in whatever year you like.

This effectively disconnects the year of your tax deduction from the year the non-profit receives the gift.

From age 70½, give to charities using a “qualified charitable donation”
For years, the IRS has allowed people over age 70½ to give up to $100,000 annually from an IRA or 401k to a charity and have the amount be excluded from their taxes. In practice, what most people did is give some or all of their “required minimum distribution” from their IRA to a non-profit.

Previously, for tax filers who itemized, giving to a charity directly from your IRA was typically no different than taking the money out of the IRA (fully taxable) and, in the same year, giving it to a non-profit. The gift is usually fully tax-deductible, wiping out the income from your IRA withdrawal.

But, as noted above, with the higher standard deduction, fewer people will itemize staring in 2018. More of us will use the $24,000 (per couple) standard deduction. That’s the scenario in which you should give to a charity directly from your IRA.

Here’s an example. Imagine a married couple, over 70, who must withdraw (and pay tax on) $20,000 from their IRAs. Imagine also that they will give $5,000 to charities and have deductions of $10,000 (income tax) and $5,000 (medical expenses). They will claim the standard deduction of $24,000. If they make a $5,000 QCD, they will reduce their taxable income by $5,000 and get the same $24,000 standard deduction.

The already infamous “pass-through” deduction
One of the biggest changes with the new tax bill was a preferential treatment for many business owners. In short, they can avoid tax on 20% of their taxable income. The rules are extremely complex, and if you are an employee, there’s no benefit for you.

But if you own your own business, talk to your CPA right away. For many of you, this is a huge tax reduction.

We acknowledge the excellent analysis of, which formed the basis for some of this material.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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