Crunch Time Tips for Tax Time
Each year HFS strives to educate our team and our clients on helpful tips for tax time. Click here, New Year, New Tax Changes, for a review of the Tax Cuts and Jobs Act changes. You, your CPA, and your Financial Planner can work together to plan so you have no surprises near year end. You put your trust in the team around you to be on top of the latest information and adjust plans as necessary to stay on course.
Due to the changes in tax law, the amount of people who itemize their tax returns will fall from 46 million to 16 million in the US according to The Financial Planning Association guide Money: Tax Guide 2019. This is largely due to the following changes:
Tax Law Changes
- Standard deductions increase
- The Standard deduction is now $12,000 per individual, or $24,000 per married couple. It previously was $6,350 per individual, and $12,700 per married couple. The personal exemption of $4,050 per dependent is now gone.
- Example: Families in the US earning between $49,000 and $86,000 will pay an average of $930 less in taxes in 2018*
- The Standard deduction is now $12,000 per individual, or $24,000 per married couple. It previously was $6,350 per individual, and $12,700 per married couple. The personal exemption of $4,050 per dependent is now gone.
- State and local taxes for income and property used to be fully deductible on a tax return
- The new tax law caps deduction at $10,000. Higher income earners will see some of the lost deduction offset by a standard deduction, depending on your filing method, but may still lose deductibility of state and local taxes.
- Higher tax states such as California, New York, Maryland, and homes with middle to high property values will see a loss in the amount they could previously deduct in property taxes.
- Mortgage interest can be deducted on a mortgage up to $750,000. The previous tax law allowed for a deduction of interest on a mortgage up to $1,000,000
- Tax credit eligibility changes
- The child tax credit increased from $1,000 per qualifying child to $2,000 per qualifying child (if you have 2+ children the percent of the credit you can use is adjusted. Please consult your tax professional for this piece).
- This credit begins to phase out at $400,000 of adjusted gross income
- Example: A family who earns $80,000 and uses the standard deduction will save near $2,240 in taxes owed in 2019 due to the increased standard deduction combined with the child tax credit*
- This credit used to be for children under age 19, or from ages 19-24 who were students.
- Now this credit is for children ages 16 and under. There is a $500 tax credit for those dependents who do not qualify for the new age restrictions on this credit.
- The child tax credit increased from $1,000 per qualifying child to $2,000 per qualifying child (if you have 2+ children the percent of the credit you can use is adjusted. Please consult your tax professional for this piece).
- Those who own pass-through businesses, such as an LLC, S corporation, partnership, or sole-proprietorship, or 1099 (gig-economy worker) now have a 20% deduction on this business income
- Example: If you are one of these individuals and make $50,000 per year, then this new 20% deduction will save you $1,750 per year, according to FPA’s Money Tax Guide for 2019. This is an additional $700 savings to someone who earns a comparable salary but is a salaried employee of a firm.
- Retirees (among other categories of families) also say changes to the tax law can impact them
- Nearly 9 million Americans deducted medical expenses in 2015, and nearly ¾ of them were age 50 or older, according to a study done by AARP Public Policy Institute.
- In 2017 you could write off medical expenses greater than 7.5% of adjusted gross income (AGI).
- In 2018 the threshold changed to 10% or more of AGI that can be written off.
With comprehensive changes in the tax law HFS wants to highlight important planning tools for you to consider with regard to adjusting your financial planning in order to stay on track to meet your goals:
Plan Enhancements
- Medical Expenses
- The IRS publication 502 shows medical procedures that can be written off. Home improvements due to elder age do qualify in many cases! Planning some of these medical expenses, that you have discretion on, can help clear the 10% of AGI hurdle to benefit you at tax time.
- Charitable Contributions
- Contribute to charity, perhaps with your required minimum distributions.
- Or: contribute to charity in different frequencies to take advantage of those deduction increases in the tax law.
- Rainy Day Fund
- With refunds that may come it is important to assess your rainy day fund to make sure 3-6 months of living expenses are in a safe place in case you get caught out in some weather.
- Strategic Business Planning with the new pass-through income laws
Regular review and adjustments to your financial plan helps keep you on track. Having a trusted team including your CPA and your Financial Planner build a core group of individuals who work to protect your interests and help you achieve your financial goals. At HFS our goal is to build the Lifestyle that you want to live, and the Legacy that you want to leave behind to your Loved Ones.
Life is no different than being on a boat sailing from one destination to another. As the water ebbs and flows the boat adjusts to keep its balance to continue to its next destination. We adjust your life plan to keep your balance in pursuit of your journey.
Written by: Justin D Hamlin, CFP
*Money Tax Guide 2019 → Everything You Need to Know, March 2019
HFS Wealth Advisors are not tax professionals. Full service planning allows us to use the above facts to develop a plan that includes the Lifestyle that you want to Live, and the Legacy that you want to leave behind to your Loved ones. We work in tandem with you and your account to build your financial picture and have the best plan moving forward.
These are the opinions of Justin Hamlin and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account.