I normally write about tax strategies for business owners and real estate investors. There’s been plenty to write about with the 2018 Tax Cuts and Job Act.
Today and tomorrow, though, I want to talk about the new strategies for your personal tax return.
#1. Plan for exemptions.
Or rather, starting in 2018, there is no need to plan because exemptions are practically gone. A client asked me how to handle the “exemption” for his 21 year old child who was still in college. At best, he will get a $500 “child tax credit” now that we no longer have exemptions.
A better solution may be to have the student file his own return and take his own standard deduction. If you have a business, it’s a good way to move money from your tax bracket to your child’s. Since a standard deduction is now $12,000, you could pay your child $12,000 (even more if he or she takes out an IRA too) and it would not be subject to income tax. But, the amount comes off the top of your business income that flows through to you. Don’t forget to follow the proper procedures when hiring your child.
#2: High income tax & property tax states.
One of the big problems for residents of highly taxed state will be the new limitation on deductions for state income taxes and property taxes. You’ll only be able to deduct up to $10,000. The rest is just lost. It’s not carried forward or suspended. That’s all you get.
What’s the answer? You don’t have a lot of options. Some people are finally deciding that this is the last straw and they are planning to move.
That might seem extreme, especially if your taxes aren’t that much higher than the minimum. But let’s say you’re paying over $100,000 in state taxes, like some of my clients. Their property taxes already surpass the $10,000 maximum. Losing a $100,000 in deduction would mean $37,000 in additional taxes at the new tax rate.
#3: Own rentals; rent your home.
Your mortgage interest deduction may be limited based on your acquisition indebtedness. Your property tax deduction may be limited based on that total amount of income tax and property tax you pay.
Under the new 2018 tax law, it actually makes more sense to buy property to rent to others, so all deductions are allowed, and then rent your own home.
It’s a radical departure from the American Dream. But, right now, the way the tax law is written, you are better off renting your home and buying rentals.
#4: Get back your Home Equity interest deduction.
One of the deductions that went away is the home equity interest deduction. It’s unclear right now whether an existing loan will be grandfathered in or not. For sure, new loans won’t have deductible interest.
That is, they won’t unless you are taking advantage of this loophole!
If the loan proceeds are used for your business or investments, then the interest would be a business or investment expense. You do need to be able to prove that money was used in business with a good paper trail. But do the work, and you’ve got your deduction back again.
#5: What is your plan to get back your unreimbursed job expenses?
Most taxpayers don’t use the unreimbursed job expense deduction currently, but for those that do, this is a significant loss. Typically, the people who have a lot of these type of expenses are sales people or in a profession that requires them to take on a lot of expenses to generate bigger commissions or bonuses down the road. I have had clients who have multiple tens of thousands of dollars of this category of legitimate expenses here every year. And starting in 2018, they are gone.
If this is something you currently do, talk to your employer. Maybe you can instead get an advance against your pay to cover these expenses so that you still receive the same amount of money but some of it covers the expenses. Your employer then picks up the expense, so it’s less tax (payroll tax mainly) for the business and it’s a deductible expense taken against your reported W-2 income. You both win.
Those are just 5 possible strategies you could put in place for 2018. It only takes one winner to save a lot in your taxes. The most important thing to do is to act quickly. The 2018 Tax Cuts and Job Act is such a sweeping change that you won’t have time to wait till the last minute to make a difference in the taxes you pay.
For more strategies for your business and real estate investments, please check out the twice monthly coaching. You can sign up at https://www.ustaxaid.com/coaching-program/