With a new tax law in effect as of January 1st, effective tax planning for the coming year will require a whole new approach. The Republican tax reform proposal that was voted into law at the end of 2017 includes some sweeping changes that affect both individuals and businesses. This being the case, taxpayers can only hope to maximize their tax advantage in the coming year by becoming familiar with the provisions of Trump’s tax bill and adjusting tax strategies accordingly. While it is always wise to look at what impact financial events of a previous year have had on taxes owed, this year that impact will have to be analyzed with an eye on the potential effects of the new tax law.
The following are helpful tax planning tips for the coming year:
1) Be aware of the new tax brackets.
The new tax reform plan still has seven tax brackets (the same as the old plan), with the tax rates for each bracket mostly lower. However, the income limits of the tax brackets have changed significantly. These changes represent an important tax planning consideration, especially as they relate to realizing capital gains and capital losses and accelerating or deferring income.
2) Become familiar with changes to 529 plans.
The limit for contributing to 529 plans without a gift tax assessment has been increased from $14,000 to $15,000. In addition, the new tax law allows taxpayers to use 529 funds to cover elementary and high school tuition with a limit of $10,000 per year per beneficiary. This new provision provides a significant tax saving opportunity for those individuals who are living in states where portions of 529 plan contributions are exempt from the state income tax.
3) Make use of the more lenient medical expense deduction.
The new tax law allows taxpayers to deduct medical expenses that are in excess of 7.5 % of their adjusted gross income. This amount represents an increase in the medical expense deduction from 2017 which only allowed a tax deduction for unreimbursed medical expenses that were in excess of 10% of adjusted gross income.
4) Weigh other changes to the tax code that may affect taxes owed.
In addition to the items outlined above, there are numerous other changes to the tax code that will impact taxpayers in different ways. For example, the tax deductions for job-related moving expenses and home equity loan interest have been eliminated and the threshold for writing off mortgage interest has been reduced. Because changes such as these will affect tax related decisions as they present themselves, it is important for taxpayers to be familiar with the provisions of the new tax bill as the year gets underway.
In addition to being aware of the tax changes initiated by Trump’s tax plan, it is important, as always, to keep good records and track tax-related expenses all year long rather than scrambling to get things together at tax time. This kind of careful record- keeping, combined with making use of the tax advantages that are built into the tax code, have the potential to provide a significant savings of tax dollars. With income tax representing one of the major expenses for many households, these tax-related tasks take on a very important role.
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