Midyear Tax Planning Ideas


Don't let the new tax code get the better of you. Hear from guest blogger Paul Carlson about ways you can still reduce your tax burden for the next year.

Editor's Note: Today's guest post comes from Paul Carlson, founder and partner of Seventy2 Capital Wealth Management. His post is a reminder that we're halfway through the tax year and that while there is a lot everyone is still figuring out about the new tax code, there's some things you can be doing right now to lower your tax burden.

I have no financial relationship with Paul Carlson or Seventy2 Capital Wealth Management.

It’s officially summer, the start of midyear tax planning. With six months left in the tax year, it’s the perfect time to make some tax moves that could reduce your 2018 tax bill.

You might be feeling a bit confused about how the recent changes to tax laws will affect your returns. The December 2017 Tax Cuts and Jobs has created significant confusion for many. While the new law doesn’t impact this year’s tax return, it will impact financial planning for millions of Americans.

The news for individuals and businesses seems to be mixed.  For those who itemize, many deductions have been altered or eliminated altogether, and charitable giving might now be more complicated.  Tax preparers and the best wealth management firms are acclimating to the new law themselves while fielding questions from clients trying to understand how their finances will be impacted.

“What remains to be seen is who will be the ‘winners’ and ‘losers” of tax reform.  We’ve seen estimates where a number of our clients may end up paying more than in previous years,” says Paul Carlson, Founder and Partner of Seventy2 Capital Wealth Management.  “Until the IRS regulations are final, it’s going to make it hard to plan around certain charitable giving and investment strategies.

Here are some initial thoughts on potential tax strategies to start thinking for next year.

1. Forecast Your 2018 Taxes and Refund

It’s a good idea to have your accountant or tax professional model different 2018 returns after this year’s forms are finished. While many of the rules have yet to be written, the IRS and others have online calculators that can forecast your 2018 tax refund based on your 2017 tax return.

2. Revisit Your W-4

You may need to revisit your W-4 and adjust your withholding for 2018 in response to the new law. On January 11, the IRS published a new withholding table that eliminates personal exemptions as required under the new law. It should be noted that the new table doesn’t reflect all changes that could impact taxpayers under the new law.

3. Know That A Number of Deductions Have Been Eliminated

A number of standard deductions or exemptions were eliminated in the tax overhaul that will impact individuals and businesses. For example, it used to be possible for individual tax filers to claim a $4,050 exemption for themselves, spouses or dependents, but that exemption is now eliminated. Also gone are tax deductions for moving expenses, tax preparation and wealth management fees.  Similarly, businesses that have deducted entertainment expenses are no longer allowed to which may offset some of the benefits of the reduced corporate tax rate.

4. SALT Deductions Are Being Adjusted

The new law places a $10,000 cap on state and local income tax (SALT) deductions. The new law does increase the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly, but residents could pay substantially more in high-tax, high-income states such as California, New Jersey and New York. According to the New York Department of Taxation and Finance, the cost to New Yorkers alone could be $14 billion.

5. Home Equity Loans May Get More Expensive

One particular area where the new tax law has caused confusion is how interest on home equity loans and lines of credit can be deducted. The tax overhaul lowered from $1 million to $750,000 the amount on which interest expense on “acquisition indebtedness” could be deducted — for loans. The new law also eliminated the interest deduction on loans that are not used to “buy, build or substantially improve” a home.

6. Bundle Your Charitable Giving

For people who donate regularly, one way to navigate the new SALT limit is to bundle several years’ worth of donations into one. If you itemize, charitable donations are still deductible on federal tax returns and can raise married taxpayers filing jointly above the $24,000 standard deduction hurdle. By bundling several years’ worth of donations into a donor-advised fund, it is possible to take the deduction the year the money was transferred, but distribute the money to charity over several subsequent years. If you are interested in this approach, please reach out to us.

7. State and Federal Law Differ on College Savings Plan Uses

The tax overhaul allows greater flexibility for using tax-exempt 529 college savings plans to pay for education costs prior to high school graduation. However, some states do not follow federal guidelines for using these savings vehicles. While federal guidelines will now allow families to use 529 funds for K-12 expenses, a state government may actually penalize that practice.

8. Fewer People Will Be Affected By the Alternative Minimum Tax

The Alternative Minimum Tax served as a system to ensure that tax filers who received numerous breaks or exemptions still pay some federal tax.  However, under the new tax law, fewer people will need to calculate their tax liability using the AMT guidelines. The exemption is now raised to $70,300 for single filers and to $109,400 for married couples.

What to do now?

At the end of the day, the farther ahead you plan your tax situation, the better your chances of significantly reducing your tax burden – and better planning your financial future. Remember that no one fully understands the new law, and even the IRS and seasoned investment professionals are still trying to understand its implications. “We are monitoring IRS guidance for developments that impact our clients’ estate and retirement planning, charitable giving and overall investment strategies. But, it may take months and years before there is a consensus about the best strategies to navigate the provisions of the new tax law,” says Carlson.

Joshua Holt

Joshua Holt A practicing private equity M&A lawyer and the creator of Biglaw Investor, Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest financial advisors that provide financial advice for a fair price.

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