By Frederick “Rick” Fisher, MS, CFP®
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With the end of the year quickly approaching and a number of new tax changes coming into effect in January, now is a good time for some year-end tax planning.
The good news is that if you make $150k or less, your taxes most likely will go down, primarily due to the standard deduction rising from $12k-$15k (depending on age) to $24k-27k. The bad news is that some widely-used miscellaneous deductions are no longer allowed: these include such items as tax preparation fees, non-reimbursed employee expenses, union dues, and investment expenses.
Depending on how you have used deductions in the past, this could be a saving or an increase in your tax liability. For high-income earners and those who live in expensive neighborhoods, the ugly reality may be the limiting of property tax and CA state income tax deductions. Last year, those deductions were unlimited, but for 2018 the maximum you can deduct for both items is only $10k.
To illustrate, imagine a married couple that makes $200k and owns a home valued at $600k. In 2017, they may have paid and deducted $26k in combined property and CA state tax. In 2018, however, they would only be able to deduct $10k, which in reality is a tax increase of over $4k for 2018.
In the 1960s, the alternative minimum tax was created to ensure that very high-income earners paid a minimum tax regardless of the deductions they took. Unfortunately, by the 1990s, the tax was starting to affect the middle class and increasing their effective tax rate. Congress has finally addressed this issue by limiting its effect on only those who have $1mm in income or higher. There may be a benefit for those with children, as the child tax credit is increased from $1k-2k per child. In addition, the benefit will be available to more households as the income limit phase out increases from $75k-$110k to $200k-$400k.
How the 2018 tax changes will affect you will vary on your income and employment status. For most taxpayers, the effects will be positive. In addition to being aware of the changes is to take the time and do some year-end tax planning, including calculating your year-to-date income and making sure your withholding and/or quarterly tax payments are on target. Another planning task is to estimate any gains and losses taken through the year to see if the net is a gain or a loss, and how that may affect your income. Lastly, check your charitable contributions for the year and make any adjustments based on your tax liability. There are many 2018 tax changes that are unique in specific aspects; to see how you may be affected, contact your tax preparer or call our office at 530-273-4425 and take advantage of the beyond investments approach.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Frederick Fisher is a Registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial.
For questions or suggestions, contact Frederick at (530) 273-4425, or frederick.fisher@lpl.com, or visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.