The Tax Cuts and Jobs Act of 2017 was passed a year ago, but many of the changes won’t be obvious until taxpayers file their 2018 returns in early 2019. Among the changes you’ll see:
Fewer taxpayers will itemize their deductions. A cap of $10,000 applies to state and local taxes and expenses that were subject to a 2%-of-adjusted gross income threshold (safe deposit rentals, income tax preparation fees, unreimbursed employee expenses) are no longer deductible. On the other hand, the deduction limitation for cash gifts to charity has increased. Donors can deduct their gifts up to 60% of adjusted gross income (compared to 50% previous). Excess amounts can be carried over and deducted for up to five additional years.
Standard deductions have nearly doubled, a factor that also contributes to fewer taxpayers itemizing in 2018. The standard deductions are:
Single filers and married filing separately:
Heads of households:
Additional deductions are available to the blind and those age 65 and older.
The personal exemption for the taxpayer, spouse and any dependents is gone.
Taxpayers who make job-related moves are no longer able to deduct the cost, except for members of the military.
Casualty loss deductions are limited to those living in Presidentially declared disaster areas.
The deduction for interest on mortgages and home equity loans taken out in 2018 is limited to a total indebtedness of $750,000.
There’s Still Time
If you’re age 70½ or older and haven’t already taken the full required minimum distribution from your IRA yet, there’s a way to cut your income tax bill while providing for favorite charities. Instead of having the check sent to you — and paying income tax on the amount — you can direct the custodian to send the check to charity. There is no income tax deduction for your generosity, but you avoid the tax that you otherwise would have paid. For example, Marty has to withdraw $45,000 in 2018. If he directs that $5,000 of that amount be sent to charity, he could save $1,100 in taxes, assuming he is in a 22% income tax bracket.
Donors can give up to $100,000 annually from their IRAs. Gifts cannot be used to fund charitable remainder trusts or charitable gift annuities and must be made to public charities, not donor advised funds for private foundations.
What Is This Thing Worth?
There are many reasons you might need to know the fair market value of an asset: you plan to sell it or buy it, you want to donate the item to charity or give it to a family member, you need to insure against loss or the property is part of an estate division. Some assets may be easy to value. Publicly traded stock, for example, is generally valued at the mean (average) between the high and low selling prices for the date of the transfer.
Sometimes you’ll need a qualified appraisal for tax purposes: to claim a charitable deduction for noncash gifts (except publicly traded stock) to charity in excess of $5,000 ($10,000 if the gift is closely held stock), to prove the value of assets given to family members that exceed the $15,000 annual exclusion or to determine the value of an estate’s assets.
It’s important to engage someone who is knowledgeable in the field that is being appraised. This is especially true if you think the IRS may challenge the value placed on the property.
Fighting the Battle of the Estate Bulge
Have you tried on your wedding dress or military uniform lately? Chances are, they may not fit quite as well as they did originally. If clothes get tight after several years, generally it isn’t because the fabric has shrunk — it’s because we’ve stretched.
Estate plans can also get “too snug.” They may no longer fit our circumstances, particularly if there are added children or grandchildren we wish to provide for or if the value of assets we own has increased significantly. A will written a decade or more ago may not have anticipated the size of the estate or taken advantage of tax-saving opportunities.
What are some solutions for “middle-age estate spread”?
Trim some pounds from your estate — Consider gifts to family members to pass assets. The annual gift tax exclusion allows gifts of $15,000 tax free each year to any number of recipients. In addition, the gift tax exclusion shelters up to $11.18 million in 2018 ($11.4 million in 2019). Even if gift and estate taxes are not a concern, you might want to simply shed some of your assets and see them pass to loved ones today.
Have alterations made — See your attorney about a thorough review of your estate plans, including your will, living trust, health care power of attorney and living will. Then, review your will annually to see that your plans still reflect your current wishes.
Get active — Exercise various options for reducing or eliminating tax, including naming charity the beneficiary of retirement accounts. There are many ways to provide for your family’s future security while also supporting charity.