By Sheryl Rowling
SAN DIEGO –We recently completed the first tax season since passage of the Tax Cuts and Jobs Act. There were sweeping changes and most taxpayers experienced many unforeseen surprises. Rather than lament, we should learn from these surprises and turn them into planning opportunities for the future. Let’s look:
Surprise #1: Many taxpayers owed money or got smaller refunds than expected.
The new tax laws increased the standard deduction and lowered tax rates, but many taxpayers who were expecting sizable refunds were unpleasantly surprised come April 15.
The primary reason for this was the government’s reduction to withholding amounts. To provide taxpayers with “evidence” of big tax reductions (conveniently prior to the November mid-terms), wage earners brought home larger paychecks from lowered withholding. Unfortunately, many of these taxpayers did not experience a tax cut due to the reduction itemized deductions as well as the loss of personal exemptions.
What is your opportunity?
By proactively planning for adequate withholding and estimated tax payments, unpleasant surprises can be avoided.
Surprise #2: Itemized deductions weren’t very useful.
With a higher standard deduction and the elimination or reduction of several itemized deductions, many former itemizers found that they no longer had deductions in excess of the standard deduction. Of great concern was the loss of any tax benefit from charitable contributions.
What is your opportunity?
Your tax advisor can help you “bunch” deductions so you can at least itemize every other year. Strategies include paying three property tax installments one year and one installment the next year; bunching charitable deductions by using a donor advised fund; and prepaying January’s mortgage payment every other year.
Surprise #3: Charitable contributions were not deductible!
If you claimed the standard deduction in 2018, you might have gotten no tax benefit for charitable contributions. Beside trying to bunch deductions, as above, there’s another strategy.
What is your opportunity?
If you are over age 70-1/2 and have IRAs, you can claim charitable write-offs – even if you don’t itemize – by distributing part or all of your “required minimum distribution” (up to $100,000) directly to charity. Be sure to do this before you take your distribution!
Surprise #4: The Qualified Business Income deduction is more complicated than we thought!
There were changes and clarifications made to the QBI rules throughout tax season. The ability to properly implement these rules was, therefore, severely limited. For example, real estate rentals qualify for QBI treatment sometimes (if the activities rise to the level of a “trade or business”); self-employed health insurance, retirement plan contributions and half of self-employment tax reduce total QBI; and dividends from REITs and REIT mutual funds qualify for the 20% QBI deduction.
What is your opportunity?
For extended or potential amended returns, check to make sure you are fully taking advantage of QBI deductions. At a minimum, be sure to see if the deduction was claimed for REIT dividends – especially since many custodians missed this on their 1099s.
Final Words
As opposed to making tax filing simpler, the new tax laws are more complicated than ever. Be sure to work with a qualified tax person (CPA) to legally minimize your tax bill.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com