December is here, which means you have about a month to plan for your 2018 taxes. From experience, we’d say about 95% of taxpayers probably plan and prepare their tax return for the prior year in February. Unfortunately, this is too late to make small changes that could potentially save you a significant amount of money.
Throughout the year we have stated that tax reform will meaningfully change taxes for many people; however, you need to know that the changes may not be the obvious ones like the elimination of the personal exemptions.
Let’s look at a simplified, generic example: a married couple with two children under age 17 and an AGI of $275,000. They have a Georgia income tax bill of around $16,000 and pay around $14,000 in mortgage interest. They also pay about $8,000 in property tax. In 2017, they were subject to the alternative minimum tax and had a tax liability of a little more than $52,800.
Under the new rules, they lose their personal exemptions, but their children qualify for the child tax credit because the income limits were substantially increased from $110,000 to $400,000 for married filing jointly before the phaseout begins. Furthermore, a tax credit is a dollar-for-dollar reduction in your tax liability.
The next significant change is that in 2017, they paid around $24,000 in state and local taxes that they were able to take as a deduction. Tax reform has limited the state and local taxes (SALT), which include state and local property taxes, state and local income tax and sales taxes, to $10,000. This means for 2018, they have itemized deductions of $24,000 ($14,000 in mortgage interest plus $10,000 in SALT). This puts them right at the cusp of the standard deduction for married filing jointly. They could choose to simplify their tax return and take the standard deduction. Additionally, the income threshold for the alternative minimum tax was dramatically raised to $1,000,000 for joint filers, so this couple was easily pushed out of the alternative minimum tax. Their 2018 federal tax liability should be a little more than $45,000—a significant savings.
However, this situation warrants looking at their state tax liability. Georgia’s standard deduction for married filers is $6,000. If these taxpayers choose to take the standard deduction on their federal return, they must take the standard deduction on their state return, meaning they would potentially lose around $18,000 in deductions.
In this situation, if this couple had waited until February 2019 to focus on their 2018 taxes, there would be little they could do to improve their situation. However, knowing where they stand in December would provide them time to donate to charity to push them over the standard deduction threshold. They would be able to itemize their federal and state returns.
Another area we feel taxpayers should look at is their withholding. While the tax brackets were reduced, the IRS didn’t issue new withholding tables for employers to use until late February. If you received a refund for 2017, don’t assume you will receive a larger refund for 2018. The new withholding tables decreased the taxes you’ve paid and put more cash in your wallet throughout the year. Looking at what you’ve paid for the year now provides you time to make adjustments in December so that you can avoid any underpayment penalties.
While this is certainly a simplified situation, the point is to be aware of the changes and how they may affect you. It is important to plan in advance so that you do not miss an opportunity to make changes.
If you have questions regarding your 2018 taxes, the experts at Henssler Financial will be glad to help: