Tax Strategy means you should be thinking about taxes through your entire year instead of a panicky a week before deadlines. As summer fades, we have been busily assisting our clients teaching our clients some of the effects of the Tax Cuts and Jobs Act on their tax planning and strategy.
At Gavrilov & Co, we know it’s possible you have not yet begun your tax planning. So we hope this blog inspires you to get a grip on your possibly hidden opportunities. Likewise you might not have given the Tax Cuts and Jobs Act much thought in recent months. So, as we consider strategies, let us review some key points about the new tax code.
Introducing a Triple Scoop of Tax Strategy Planning
Experts are telling us that there are over 130 new tax provisions due to the the Tax Cuts and Jobs Act .
However, in today’s Tax Strategy 101 blog, we are only presenting you with three such policies and some strategies you might use with them.
We named these three tax strategies “scoops,” in honor of the final days of summer. Although it’s officially back-to-school time, children are still enjoying triple scooped ice cream cones NYC parks. No doubt the pending fall and winter seasons will soon drive children to exchange those frozen treats for hot cocoa. This change will be happening just as tax-planning time really heats up or slips away. And shortly thereafter, filing time begins.
Scoop of Strategy Number One: The Great Trade-off and What It Might Mean To You
As we have announced previously, we present a few reminders, especially to refresh your mind if you have not been thinking about your taxes since last spring.
- On the one hand, The Tax Cuts and Jobs Act just about doubles the standard deduction. “This means that for 2018, joint filers can enjoy a standard deduction of $24,000.”
- On the other hand, the law has eliminated personal exemption deductions. And lawmakers eradicated or limited many of the itemized deductions.
- In New York City, one of the most painful changes was the $10,000.00 cap placed on state and local tax deductions. Four states, including New York are challenging this policy in court with lawsuits against the federal government. So we’ll be informing you of upcoming news as it happens.
- Likewise, “the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2 percent floor. This includes items like tax preparation fees and employee business expenses…
- Did you recently buy a home? We are sure you know the law now “limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.”
There is Good News
In spite of some of the changes in the law, we think many of you who routinely use the standard deduction will see a decrease in your tax bill.
It’s a delicate balance because of the great trade-off. You lose those personal exemptions, but you gain a larger standard deduction and a larger child tax credit. Don’t forget, Gavrilov & Co is here to run the figures and help you create a strategy.
Scoop of Tax Strategy Number Two: Re-check your Qualified 529 Tuition Plans
We usually think of college when we think of Qualified Tuition Plans or 529’s. Indeed, Qualified Tuition Plans, also called 529 plans, are a great way to take the stress out of paying college tuition bills. But,there something new in the 529 World. Before the Tax Cuts and Jobs Act, you could withdraw earnings from a 529 plan. However, those funds could be tax-free only “for qualified higher education at colleges, universities, vocational schools or other post-secondary schools.”
Now, provisions in the Tax Cuts and Jobs Act have changed. You can use earnings from 529 plans to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year.
The Strategy behind Setting up a 529 Plan
So, moms and dads, suppose you are paying tuition for your children or or grandchildren to attend elementary or secondary schools, use the strategy built into the 529 plan. A post-script: we are not saying tuition is a tax deduction. But, withdrawals from the specific 529 account, for tuition at qualified educational institution are tax exempt.
In the exact words of the IRS, “Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board at an eligible education institution and tuition at elementary or secondary schools.” Just remember, contributions to a 529 plan, however, are not deductible. And non-taxable withdrawals cannot exceed $10,000.00.
A Tax Strategy That Helps Pay for Your Child’s Computer
However, when your child needs a computer, the 529 can come to your rescue. You can make withdrawals from it for the costs of computer technology or equipment.
The IRS states, “A qualified, nontaxable distribution from a 529 plan includes the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access….”
In strategizing a 529 withdrawal for computers or software, check the IRS online resources to discover the extensive technology it covers.
Scoop of Strategy Number Three — Surprise: A Little Known Flavor of the Home Equity Debt Interest
Perhaps you thought, due to all the hype, that you could never deduct home equity debt interest. Wrong! Your tax professional can show you that under the Tax Cuts and Jobs Act, “interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan.”
We cannot help but feel that his little tax strategy might come in handy if you have to use your equity to replace the roof, add a bedroom, or replace the central heat-and-air unit of your home. On the other hand, of course the interest is not deductible if you use the cash for personal or credit card debt, not even if you did it prior to 2018.
The Twist in this Strategy: Perfect Records
The amazing strategy behind this is that the government treats the debt like a home acquisition debt. Therefore, remember it has a $750,000 limit, or $375,000 if you are single. So, Gavrilov & Co advises clients to keep meticulous records and receipts on such matters. That is the way you document exactly how you used the money on the house.
Take-Aways from your A Triple-Scoop Tax Strategy Treat
In case you haven’t noticed, it’s tax-planning season. It will soon be too late for plans and strategy. Right now is the perfect time to strategize your tax planning and even optimize your tax situation for future years. Gavrilov & Co can show you how.
Once again, we must express our gratitude to readers who visit our website and read our blog. We send you a triple scoop of gratitude and that won’t melt in the late summer heat.