The Tax Cuts and Jobs Act created many changes to deductions. The tax reform increased the standard deduction to $12,000 for single filers and $24,000 for joint filers, while limiting itemized deductions and creating a new qualified business income deduction.
Melissa Knisely, tax department senior manager at Ciuni & Panichi Inc., says it was challenging to plan for 2018 before the end of 2018 and even into the beginning of 2019. Tax advisers didn’t have some of the regulations, so they didn’t know the rules, either.
However, as individual and business returns are being completed, a few trends are beginning to emerge.
“We have been doing a lot of planning around timing of deductions and deferring or accelerating of income. Those are the three biggest things we’re seeing with personal returns,” Knisely says.
The results have been unique to each person’s situation.
“You really can’t make a prediction based on one scenario, like we have been able to do in the past,” she says. “We’ve had to look at everybody’s situation individually. They are all different.”
Smart Business spoke with Knisely about some of the changes under tax reform and how taxpayers can use lessons from 2018 to plan for the future.
Which deduction change is catching business owners and executives off guard the most?
One of the biggest changes is the cap on state, local and real estate taxes. For example, if a taxpayer paid $5,000 of state tax, $2,000 of local tax and then $15,000 in real estate taxes in 2018, they cannot deduct more than $10,000 for all three of those together. Previously they would have been able to deduct all $22,000 of the tax that was paid during the year.
Under tax reform, they may not benefit from all of the tax that was paid during the year and it could cause them to no longer itemize their deductions.
How are fewer itemized deductions affecting other areas like charitable contributions?
Since the cap on taxes may have caused them to no longer itemize deductions, taxpayers may have to adjust other deductions accordingly.
One option is to bunch charitable contributions together, enabling them to itemize one year and take the standard deduction the next year.
Another other option is to pre-fund charitable contributions by setting up a donor-advised fund. They get the deduction in the year that the donor-advised fund is funded and then they are able to direct the contributions to charities from there.
What should taxpayers do to determine which year is best to have more deductions and itemize?
Taxpayers, and their tax advisers, will want to look out a couple of years to try to plan for when they think they’re going to have more income versus when they are not. Does it make sense to accelerate income into the current year or to defer it to the next year?
Many of the changes under tax reform go through 2025, so now that tax advisers have more answers to the questions than they had at year-end planning, they can help taxpayers adjust accordingly.
How can people get a jump on next year’s taxes before they put away the 2018 return?
If in the past they have not owed and now they do, what’s the reason for that? It may be as simple as they didn’t have enough withheld from their paycheck.
Also, if people are waiting to do their returns until later in the year, they may want to accelerate their timing, so they know where they stand. While an extension of time to file may be necessary, taxpayers should try to get that information sooner rather than later.
Insights Accounting is brought to you by Ciuni & Panichi Inc.