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4 Key Tax Categories for Early Planning for 2018 Filing Season

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Once your client has filed a return for the 2017 tax year, they should start thinking about tax planning for 2018, says Megan Gorman, a founding partner of Chequers Financial Management in San Francisco.

“This is the year you have to start early because there are so many changes and so many moving pieces,” says Gorman, referring to the new tax law.

“It’s key that advisors have deeper discussions with clients about the impact overall from the tax law changes,” says Gorman, but she cautions against rushing into taking any action.

For one thing, despite  “the new tax code” there hasn’t been “a full and certain interpretation,” says Gorman, noting this is especially true for the 20% deduction of income from pass-through businesses such as partnerships,  sole proprietorships and limited liability companies.

Still, there are issues your clients should begin to consider, according to Gorman.

1. Paycheck withholdings. Taxpayers who have seen a federal tax cut this year may be having too much money withheld from their paychecks while those whose taxes are rising may be having too little withheld. In both cases taxpayers need to consider their individual circumstances because there are many variables to take into account.

“A lot of taxpayers in high tax states felt they were going to have a tax increase because the new tax law limited the deduction for state and local taxes” (SALT) to $10,000, explains Gorman. But under the old tax law they weren’t able to deduct the full amount of the tax deduction due to the Alternative Minimum Tax (AMT) and under the new tax, though they will be subject to the limited SALT deduction, they won’t be.

(Related: Tax Overhaul’s Impact on Homeowners Varies Widely: New York Fed)

The new tax regime increases the amount of income exempt from the AMT substantially, to $1 million for joint fliers, up from $160,900,  and to $500,000, up from $120,700, for individuals. The tax Policy Center expects only about 200,000 tax filers will be subject to the AMT in 2018, down from 5.25 million under the old tax law

Taxpayers can consult the IRS withholding calculator to check if too much or too little is being withheld from their paychecks.

2. Itemized deductions. Given the new limits on SALT deductions, the larger standard deduction and the decline in marginal tax rates — which reduces the value of tax deductions — far fewer taxpayers are expected to itemize when filing this year’s taxes compared to last. Roughly 14% of taxpayers are expected to itemize, down from about 33%.

(Related: 3 Reasons Tax Season Is THE Time to Talk About Annuities)

By limiting the SALT deduction, taxpayers will be left with two big levers to pull when deciding about whether to itemize or not: mortgage interest rate deduction and charitable deduction, says Gorman. “I’ve run numerous projections where we are taking the standard deduction.”

3. Charitable deductions. Those taxpayers who won’t be itemizing on a regular basis and are having a good year financially should consider bundling multiple years worth of donations to charity into a single year, says Gorman. She recommends doing this through donor-advised funds, which allow for in-kind donations like securities and allow for distributions of donations over time.

4. Child tax credit. Under the new tax law this credit is doubled from $1,000 to $2,000 per child and many more families qualify for it. The credit doesn’t begin to phase out for a married couple filing jointly until their AGI reaches $400,000, up from $110,000 previously, and for single heads of household not until $200,000, up from $75,000.