Tax Planning Strategies to Get the Most Out of Your Deductions
June 19, 2018 — Can you itemize, or will you be claiming your new standard deduction? Once you understand the levers available, you’ll know which among them you can pull when it comes to paying Uncle Sam.
For one, you may be able to maximize your personal deduction through bunching. It’s a great way to ensure that your deductions will exceed the new standard deduction thresholds and is especially beneficial in a year in which you know that you will have a higher than normal income.
Let’s say you were expecting to sell a business or investments. In that case, you might expect that your income would be substantially higher than in other years. Bunching is the idea that you would attempt to soothe some of the sting by considering the timing of controllable expenses, such as:
- Medical expenses;
- Charitable deductions; or
- State taxes.
Example: Assume Mr. and Mrs. Smith have adjusted gross income of $140,000 annually. They pay annual medical expenses of $13,000, make annual donations of $20,000 to their favorite charities, and pay taxes of $3,000 per year.
Figure 1. An example of no bunching.
Now assume the Smiths will receive additional investment income of $20,000 in 2019 and 2021. By bunching, they are going to reallocate some of their medical expenses and donations to those years.
Figure 2: What can bunching do for you? (or the Smiths?)
Standard and Itemized Deduction Changes
Standard and Itemized Deductions prior to TCJA and after the TCJA were changed like this:
|Standard Deductions in the Past||Standard Deductions Post Tax Reform|
|$13,000 joint/surviving spouse||$24,000 joint|
|$6,500 single||$12,000 single|
|$9,550 head of household||$18,000 head of household|
Major changes to Itemized deductions include:
- State and local taxation (SALT) limit of $10,000 for what you claim for all state and local sales, income, and property taxes together;
- Medical Expenses subject to 7.5% of AGI for 2017 and 2018, and 10% thereafter;
- Home mortgage interest deduction limited to total acquisition debt of $750,000. (See graphic. Click to jump to related article.);
- Elimination of miscellaneous itemized deductions subject to 2% floor. Some of the list includes deductions for employee expenses that are not reimbursed, like cleaning supplies, service worker uniforms, etc.;
- Changes to Hobby Expenses* (see link below); and
- PEASE Limitation is suspended until 2026 —this limitation applied to many high-income individuals and limited itemized deductions when AGI exceeded a certain threshold.
Things You Can Do
- You can utilize bunching as mentioned above, and also, while the PEASE limitation is suspended, the effect on the deductibility of most charitable giving should be negligible. We have an article on the topic of charitable giving coming soon, so keep your eyes open for that.
- You can also reimburse Employee Business Expenses under an accountable plan, as employees can no longer deduct them on the own returns. Another important thing to remember is that a business should be conducted in a business-like manner; otherwise your business may become a hobby in the eyes of the IRS, disallowing your deductions. *You can read more on this topic in this recent article on Hobby Losses by Edmund Brewer and Gloria McDonnell.
- Utilize Home Equity line of credit proceeds to fund your Schedule C, E, F and Investment activities. Tracing rules are still in place and these types of transactions should be supported by proper documentation.