The 2017 Tax Cuts and Jobs Act (TCJA) changed the landscape of planning for individuals, business owners, estates, and trusts. Tax planning has now become very individualized, everyone’s situation is unique and many of the past rules no longer apply. Multi-year planning is also now a must. With the opportunity for income/deduction “bunching,” an important part of planning, it is hard to just look at one year. Sometimes generating income can save taxes in the long run. It is no longer simply a matter of deferring income or accelerating deductions. We also often look at “multi-generational” tax planning. There may be opportunities to shift income to lower bracket parents or children to reduce the overall tax burden for the family.
We also believe that TCJA increases the importance of integrating your income tax planning with other areas of your personal financial planning. As you will see in a number of the points below, tax planning should be woven into retirement planning, investment strategy, and estate planning. While the top tax rates have dropped, other provisions might actually increase your taxes.
Here are some of the key areas we are focusing on with clients now:
- Consider the timing of your itemized deductions. With the limitation of state and local taxes (SALT) to $10,000 and the increase of the standard deduction to $24,000 for a married couple, many clients no longer will itemize deductions (especially if they do not have a mortgage). It may make sense to “bunch” your deductions in alternating years to take advantage of itemizing one year and the standard deduction the next. For example, do most charitable giving every other year.
- The role of charitable giving in your planning may be an important area for you. It is always good to consider using appreciated securities to fund your charitable gifts. Many of our clients also use Donor Advised Funds (DAF) to manage their charitable giving. Since you get a deduction when you put assets into the DAF, but can distribute it out to charities over subsequent years, it gives you more control over the timing of the charitable deduction.
- One of the most complex and still evolving aspects of TCJA is Section 199A, which allows a deduction for a portion of qualified business income (QBI) coming from sole proprietorships, partnerships, LLC’s, and S corporations. While the details of these calculations are beyond the scope of this article, if you have income from these sources, we should talk about the potential impact and planning around it.
- Asset location or whether you put certain asset classes in your qualified retirement or regular taxable accounts continues to be very important. The 3.8% Medicare Surtax on Net Investment Income is still in the law. We typically like to see inefficient asset classes (like REIT’s and certain categories of fixed income) in tax sheltered retirement accounts. However, with the new rules for the 20% deduction for QBI, we may re-evaluate this strategy.
- Bracket management continues to be important, especially as you transition to retirement. For many of our clients, their taxable income may decrease temporarily during this time period, before they have to start taking required minimum distributions (RMD) from their IRA’s. Multiyear cash flow and tax projections become an important tool to help them decide if income should be shifted into current years. Roth IRA conversions are a great way to do this even though TCJA took away the “free look back” that you had to recharacterize a Roth conversion.
- The estate planning landscape has changed dramatically. The prior exemption of $5.45 million per individual has increased to $11.2 million. While this seems to suggest that many more people do not have to worry about estate tax planning, we are not sure that is true. First, this change sunsets in 2025, and many experts worry that it could decrease sooner if we get leadership change in Congress or the White House. Secondly, many states do not follow the Federal exemption (MD being a prime example as they froze the exemption at $5 million this legislative session), so State estate planning may still be important. Finally, estate planning is so much more than just planning for estate TAX, it is also important to make sure your assets pass to your heirs in the amounts and forms that you desire.
- Tax planning should always be part of your investment strategy. As mentioned earlier, the Medicare surtax is still in existence. The timing of sales of securities is still important. We feel that a regular program of harvesting capital losses can add value to portfolio management. There may also be times to harvest gains, specifically if there is an opportunity to take advantage of the 0% capital gains rate which goes all the way up to $77k of income for married filing joint. Evaluating real estate investments and rental properties now gets more complex with the QBI rules.
- Risk management and insurance planning continue to be important. While at first blush, with a much higher estate exemption (over $22 million for a couple now), it may look like the need for insurance is no longer there. But insurance can still provide liquidity needs and also have investment elements as well. It makes sense to understand your current coverages and the best way to start that process is with an “in force ledger” so that you can think about your options on policies.
We spend a lot of our time working with clients on various aspects of their personal finances. Tax planning is just one piece of that, but it needs to be integrated carefully in the overall picture. We would be glad to meet or talk with you in the coming months about you own personal situation.
-Lyle K. Benson, Jr., CPA
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.Please see Additional Disclosures more information.