We continue our blog series recapping our recent presentation on the new tax laws to the Indian Valley Chamber of Commerce. This blog discusses opportunities for tax beneficial wealth and retirement planning.
Tax years 2018 to 2025 (the year many of the changes within the Tax Cuts and Jobs Act are set to expire) brings many changes in the status quo to the individual taxpayer, including:
- Brackets expanded and tax rates are lowered
- Capital Gains tax rate changes
- Standard Deduction increase
- State and Local Tax limitation (capped at $10,000)
- Mortgage Interest Deduction limitations (Home Equity interest no longer deductible)
- Elimination of miscellaneous Itemized Deductions
- Suspension of Personal Exemptions
- Child Tax Credit expanded
- Significant impact on AMT
At first glance, the lowering of the overall tax rate and the increase in the standard deduction looks like good news to most taxpayers. However, not necessarily so when placed alongside the loss of personal exemptions, miscellaneous itemized deductions, home equity interested deductions, and the rest of the negative impact items listed above.
These changes do present four opportunities to create long-term strategies to help build wealth as well as plan for retirement:
“Play” the Tax Brackets and Standard Deduction
For 2018, the standard deduction is now $24,000. If you’re over 65, it is $26,600. One avenue to get the most out of this scenario is to stagger the taxable year of deduction timing given this higher standard deduction.
Let’s look at charitable giving. In years past, your donations would be included amongst your itemized deductions. Now, you might consider frontloading your giving at a higher amount into a Donor Advised Fund. So, if you normally donate $5,000 each year, consider placing $25,000 now into a Donor Advised Fund – this places you above the $24,000 threshold of the standard deduction. Then, over the course of five years, give the annual gift of $5,000 from that Donor Advised Fund. This allows you to get the full advantage of the standard deduction in one tax year, followed by several tax years of maximizing itemized deductions.
Portfolio Rebalancing / Tax Loss Harvesting / Capital Gain Harvesting
Take advantage of stock market downturns and volatility by rebalancing to a formal investment allocation. The more volatile things are, the better the portfolio rebalancing works. Studies show a .75% higher return when rebalancing to a formal investment allocation.
Tax loss harvesting comes into play when the market goes down, allowing you to generate a tax loss. You can still reinvest in a similar fund and enjoy the benefits of that investment.
With historically low Capital Gains rates, take advantage of a zero tax rate Capital Gains situation. It might be an ideal time to sell certain assets, pay zero tax, and reinvest.
Dynamic Asset Location Optimization
Where are you placing your wealth as you go through life?
- Tax Deferred: IRA, 401(k), 403(b)
- Taxable: Investment Accounts, Bank Accounts
- Tax Free: Roth IRA, Roth 401(k)
And, when you retire, from where will you draw this wealth? Think about an asset allocation mix between these three wealth locations.
Roth 401k & IRA
Use this 2018-2025 window of low tax rates to your advantage, with a tax-free Roth 401(k) or IRA. Consider converting 100% of your IRA to a Roth account to allow for “back door” (long-term) Roth IRA contributions in the future or convert smaller amounts over several years.
If you have any questions or concerns about these changes, please call us at 215-723-4881. You may also consult our free online 2018-19 Tax Planning, which can be found here.
To view the portions of his seminar that were broadcast via Facebook Live, please visit our Facebook page.