Giving Strategies: Top Five 2018 Changes that Impact Taxpayers
A Giving Strategies post by Jim Friedman, Director of Gift Planning & Endowments, Jewish Federation of Cincinnati
The Tax Cuts and Jobs Act (TCJA) was the most comprehensive revision of income taxes in the last three decades. As taxpayers and their advisors start to prepare their 2018 income tax returns, this would be a good time to consider five changes the TCJA may have on your personal tax planning.
The top five changes for most taxpayers are: the increase in the standard deduction, home mortgage interest, new limitations on state and local tax deductions, an increase in the child tax credit, and the repeal of miscellaneous deductions.
1. Standard Deduction– The TCJA eliminated personal and dependent exemptions, and substituted a much larger standard deduction. The standard deduction for married couples filing joint returns nearly doubled, from $12,700 in 2017 to $24,000 in 2018. The standard deduction for single filers increased from $6,350 to $12,000. Even though taxpayers lost the personal exemption, the dramatically increased standard deduction will simplify tax filing for many Americans. An estimated 90% of taxpayers will use the standard deduction for 2018 returns. The number of itemizers is likely to decline from 30% in 2017 to 10% in 2018.
2. Home Mortgage Interest– If you itemize, your home mortgage interest is generally deductible. The TCJA reduced the loan limits for mortgages after December 15, 2017 from $1 million to $750,000. This new loan limit will not apply to homes under contract by December 15, 2017 with closings by March 31, 2018, and to refinancing where the new loan balance is equal to or less than the previous amount. Most home equity loan interest is no longer deductible.
3. State and Local Taxes (SALT)– Prior to 2018, the itemizable deduction for SALT had no limit. The TCJA now imposes a ceiling: the deduction for SALT is capped at a maximum amount of $10,000 in 2018. You must combine property taxes on a US residence with state and local income taxes; the total deduction cannot exceed $10,000. Many upper-income individuals from high-tax states will pay larger federal taxes for 2018 due to the $10,000 SALT limit.
4. Child Tax Credit– Families will benefit from a $2,000 tax credit per dependent child. With several child credits and the increased standard deductions for married couples of $24,000, some families will pay no federal income tax. Some families may qualify for up to a $1,400 refund on each child's tax credit.
5. Miscellaneous Deductions– In 2017, your miscellaneous deductions for investment expenses, unreimbursed employee business expenses, tax preparation fees, and other fees could be deducted if they were over 2% of your adjusted gross income. The miscellaneous deductions were repealed by the TCJA. Result: we lost our itemizable deductions for 2018.
NOTE: Many of the taxpayers who will now take the standard deduction rather than itemizing (because the new standard deduction is larger) are over age 70½. Most of these taxpayers have a traditional IRA or other qualified retirement plan and must take a taxable “required minimum distribution” (RMD). If you are in that group and support charitable organizations, consider making your gifts through an IRA rollover contribution directly from your IRA to the charity.
These Qualified Charitable Distributions count toward fulfilling your Required Minimum Distribution from your IRA and Qualified Charitable Distributions are excluded from your gross income – you pay no federal income tax. And if you live in a state that uses federal income to calculate state income tax, you avoid state income tax on your Qualified Charitable Distributions as well. Further, since Qualified Charitable Distributions lower your federal income, you may also lower your Medicare Part B and Medicare Part D (drug) insurance premiums since these premiums increase as your federal income increases.
Donors over 70 ½ who have made a legacy commitment to our community-wide Create Your Jewish Legacy initiative have the option to make a Qualified Charitable Distribution of up to $100,000 per year to fund their legacy commitment now. Not only is this an opportunity to see the impact of the gift during the donor’s lifetime, it also benefits the charity with 100% of the gift versus any amounts from the IRA eventually going to heirs, which will be subject to ordinary income taxes.
This article is for informational purposes only and should not be construed as legal, tax, or financial advice. When considering gift planning strategies, you should always consult with your legal and tax advisors.
You can reach Jim Friedman, Director, Gift Planning and Endowments, at 513-985-1524 or firstname.lastname@example.org. You can reach the Federation’s Create Your Jewish Legacy team here and the Create Your Jewish Legacy website here.
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