The only thing financial advisers know for certain about the new Trump tax plan is that nothing is very certain at all. While some workers in some tax brackets can expect to have less money deducted from their paychecks, that doesn’t mean they will necessarily see a real reduction in their actual tax liability when they fill out their 1040 next April, 2019.
Tax planning may be more important now than ever
While we have heard the supporters talk about how much better off the “average American” will be, nobody is quite certain who will fall into that “average” category. Much will depend upon how you file and how your state and local taxes (SALT) taxes affect your federal taxes now. The one thing experts do agree on, however, is that 2018 is not the time to take your eye off the ball when doing your tax planning
In an article published recently in the Detroit Free Press, Jeffrey Barringer, a partner at PricewaterhouseCoopers in Detroit, gives an indication of just how complicated and confusing the law may be. “Every tax professional should have reached out to their clients and talked to them about this by now. If that hasn’t happened, they (individuals and businesses) should be reaching out to their accountants.”
The more complicated your financial life is, the less this simple tax plan will be
Throughout the 2016 presidential campaign it was not uncommon to hear talk of filing taxes on a post card. While the tax plan was originally sold as a means to simplify taxes, that goal quickly went by the wayside. Like most things in government, special interests and re-election plans got in the way of what some thought were good ideas. The final tax law includes increased personal deductions, coming at the expense of decreased itemized deductions often favored by business owners.
Things to consider when planning
So, what do the experts say about meeting your tax planning objectives? Here are some basic strategies:
Remember that the W-4 you fill out for your employer is your best-guess at how much you should have deducted from each paycheck. The new tax law will affect nearly everyone’s withholdings, driving their paychecks higher by a few dollars. If you are concerned about owing because of the way you file, your first call should be to your HR department to change your withholdings to have more taken out. The upward withholding change should be moderate for most middle-class workers. The IRS has published a tax calculator to help people determine what the right amount should be.
The standard deduction married couples filing jointly can now take under the new law will rise from $13,000 to $24,000. That sounds like a whopping change, but it comes at the expense of many itemized deductions that upper middle class and upper class filers used to take advantage of. Remember those state and local taxes that were once deductible? Some of the increase to $24,000 standard deduction will be paid for out of that amount. Not sure where you will end up? It might be a good idea to take out last year’s tax forms and run the new numbers against your old itemized deductions.
The mortgage interest deduction has changed and will affect people who typically itemize their interest, as well. On your principle mortgage up $1 million, nothing will change, as long as you assumed the loan before mid-December of 2017. Any mortgage taken on after the 15th will be restricted to $750,000. And the old favorite deduction for interest taken out on home equity loans will also be severely restricted.
Will you come out ahead?
Even the supporters of the bill in Congress have admitted that the new tax law was designed to reduce taxes. But according to the non-partisan Tax Policy Center, millions of Americans will see their tax liabilities increase — again depending upon how they file their taxes. Whether you are in the group that comes out better off or will be paying more will have a lot to do with what you handle tax planning in 2018.