Tax Planning for 2018: Tips from a FPA-NJ Seminar

The Financial Planning Association of New Jersey (FPA-NJ) recently held a seminar on the Tax Cuts and Jobs Act of 2017 (TCJA) and associated tax planning strategies. Below are some highlights:
  • Not everyone with a high income, even in a high-cost state like NJ, will pay more taxes under the TCJA. The alternative minimum tax (AMT) is basically going away for the great majority of taxpayers (exception: people with valuable incentive stock options) and people who formerly paid the AMT weren’t getting now-limited tax deductions anyway. Those most likely to pay more tax under the TCJA have incomes between $100,000 and $200,000, formerly itemized deductions, and did not formerly pay the AMT.
  • People have three months left to adjust their tax withholding or final estimated tax payment (if self-employed). CPAs have software to make 2018 tax projections and many are performing free or low cost projections for their clients. Bring your latest pay stub for this review. Some tax experts believe that tax withholding is too low for many taxpayers and that these taxpayers will get smaller refunds or owe taxes and/or under-withholding penalties next April.
  • Required minimum distribution (RMD) distributions from an IRA to a qualified charity by a person age 70½ and older should be done as a direct transfer to the charity. Allow enough time for the IRA custodian to process the paperwork and keep records (in the event of an audit) that provide proof that the IRA withdrawal went to a charity.
     
  • It is probably too late to file for a divorce under the pre-TCJA rules where alimony was deductible (payor) and taxable (recipient). Divorces filed now will not get through the courts in time.
     
Below are five specific tax planning strategies that were mentioned at the seminar:
  • Track what you do with the proceeds of a home equity loan. Many people did not previously keep records for this and will need to retrace their past transactions. Home equity loan interest is only deductible if the loan was used to purchase or improve a home.
     
  • Assess where you are income-wise for 2018 before taking capital gains and losses. Capital gains tax rates are now tied to income ranges rather than marginal tax brackets.
  • Consider using a donor advised fund (DAF) to “lump” charitable contributions to get over the standard deduction amount and benefit from itemizing deductions. Two other strategies to benefit tax-wise from charitable contributions are to transfer appreciated securities to a DAF or directly to a charity and, for taxpayers over age 70½, make qualified distributions with withdrawals from an IRA.
     
  • Schedule elective surgery in 2018 before the tax deduction threshold for medical expenses increases from 7.5% of adjusted gross income (AGI) to 10% of AGI.
     
  • Consider a Roth IRA conversion if you are in your 60s and will have a higher marginal tax rate after age 70½ when RMD withdrawals must begin and current tax rates rise when the TCJA sunsets after 2025.