Saturday, January 22, 2022

Breaking the Code

Ask The CFP® Practitioner

“Unless you know the code, it has no meaning.”  

~ John Connolly, Irish Author,  from “The Book of Lost Things.”

Question: Would you outline last year’s tax law changes? I’m ready to do some year-end planning.

Answer: Exemptions, deductions, expenses and credits all underwent a few tweaks in 2017. You’re smart to look at the changes as 2018 comes to a close and you check your strategy. Almost all of the individual tax changes will expire at the end of 2025, unless of course there are additional changes.

The personal exemption, or the ability for most taxpayers to reduce taxable income by $4,050 is gone. In exchange, there is a higher standard deduction. The standard deduction for single taxpayers is now $12,000; married filing jointly is $24,000, and head-of-household is $18,000. If you’re over 65 you can add $1,600 to that amount or $1,300 each if married. Of course, there are particular nuances and exceptions that your tax professional can assist you with identifying.

The challenge with this shift is to find out if you’re better off itemizing deductions or taking the new higher standard deduction.

The challenge with this shift is to find out if you’re better off itemizing deductions or taking the new higher standard deduction. According to the IRS, in the past, approximately seven out of ten taxpayers took the standard deduction rather than taking time to see if itemizing was more beneficial. Since you’re getting a jump on your tax-planning, running through the numbers prior to filing will help you determine if this higher deduction is a favorable offset to itemizing deductions.

Two expenses that are no longer deductible are alimony payments and unreimbursed moving expenses. For divorce agreements signed during 2018 alimony is not deductible by the spouse who pays, nor is it taxable to the spouse who receives alimony. If divorced during 2018 or after, it may be wise to include a provision that the divorce agreement be renegotiated if tax laws change in the future. Also, unless you’re an active duty military family, unreimbursed job-related moving expenses are no longer deductible until at least 2026.

As for deductible expenses, there are some important changes here to be aware as you prepare for the end of 2018. This year, medical expenses must exceed 7.5% of adjusted gross income (AG) before they’re deductible. In 2019, this threshold increases to 10%, which may influence care and treatment decisions for some who can move up known expenses. Taxpayers 65 and older will keep the 7.5% floor going forward.

Mortgage interest is still deductible but only on loans up to $750,000 that were initiated after December 15, 2017. Loans established prior to that are capped at $1 million. Interest on home equity loans and lines of credit is still deductible but the loan must be used to “buy, build, or substantially improve” the home that secured the loan. State and local taxes (SALT) are still deductible, but are capped at $10,000 for most individuals where it had generally been unlimited in the past. Casualty losses are still deductible, but only if the casualty loss was due to a federally declared disaster. The deduction for theft losses has been repealed.

Charitable donations are still deductible, and the limit for cash contributions is now 60% of AGI. This only applies if you itemize and the total is greater than the new higher standard deduction. Something else that still applies is the credit for dependents and the child tax credit was doubled to $2,000 with a new $500 credit for other types of qualifying dependents.

Organization and preparation before year-end planning takes place can help you to have meaningful discussions with your financial advisor and tax professional. Identifying types of income you receive during the year and categorizing them can be useful because different categories carry different tax rates. Grouping earned income, investment income (taxable, tax-free, long-term gains, short-term gains, interest and dividends), retirement plan withdrawals, and other sources may guide you to your next steps. Depending on levels and types of income, you could be subject to Medicare taxes resulting from healthcare reform.

There’s still time to use strategies that could influence your overall tax liability. Strategic retirement planning both pre-and post-retirement, asset allocation, portfolio rebalancing, and tax-loss harvesting are examples of management techniques that may be useful where appropriate. Stay focused and plan according.

While we are familiar with the tax provisions presented herein, as Financial Advisors of Raymond James & Associates we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email Website:

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