1. SALT deduction workarounds. The deduction for state and local taxes is limited to $10,000 annually per tax return. State and local taxes imposed on businesses remain fully deductible. Investors should scrutinize their 2018 state and local tax payments and home office allocation to determine if any taxes are business-related and thus deductible. Further, investors whose state and local tax liability declined to under $10,000 in 2018 (perhaps because they moved to a different state) should include disallowed 2017 prepaid property taxes in 2018 taxes paid. (Photo: ShutterStock)
2. Mortgage interest. The deduction for interest paid on home equity lines of credit has been eliminated, including interest paid on existing line of credit borrowings. Subsequent IRS guidance provides an exception to the HELOC interest disallowance where the HELOC loan proceeds are used to buy, build or substantially improve the home that secures the loan. Thus, interest paid on home equity loan proceeds used to build an addition to the home is deductible, while interest on the same loan used to pay personal living expenses, such as credit card debt or college tuition, is not. (Photo: ShutterStock)
3. Charitable contributions. The law left rules for charitable contribution deductions intact, but the interplay of charitable contribution rules with the law’s higher standard deduction and limitations on other itemized deductions provides investors with both opportunities and pitfalls. Investors who otherwise take the standard deduction could consider “bundling” a number of years’ charitable contributions into a single year to exceed the standard deduction threshold. (Photo: ShutterStock)
4. IRA/charitable contribution rollover works only for investors over the age of 70-1/2. An individual over the age of 70-1/2 may transfer up to $100,000 from an IRA directly to a charity and avoid tax on the IRA distribution, and satisfy the required minimum distribution obligation. By transferring to a charity, the investor avoids paying tax on those funds. For those older than 70-1/2, the first dollars contributed to charity should be distributions from an IRA. Transfers to a donor-advised fund do not qualify. (Photo: ShutterStock)
5. Miscellaneous itemized deduction — separately managed accounts. The tax law repeals the miscellaneous itemized deductions subject to the 2% floor, including the deduction for investment fees and expenses available under prior law. Thus, an investor holding assets in an SMA that produces $100,000 of income and imposes a $1,000 fee pays tax on $100,000, because the fee is no longer deductible. However, fees that the investor incurs indirectly by way of a reduction in income inside the investment do provide a tax benefit. (Photo: ShutterStock)
6. Reduction in taxable income earned by pass-through entities. Income earned by pass-through entities flows through to the owners’ tax returns. Subject to certain limitations, the law provides a deduction of 20% of an owner’s share of business income earned by a pass-through that does not provide personal services. Combined with the new 37% top individual rate, the deduction results in a top rate of 29.6%. Owners of a pass-through that provides personal services may claim a deduction of 20% of their share of business income, but only if they report on their tax returns less than $315,000 of joint taxable income ($157,500 for single filers). (Photo: ShutterStock)
With the new tax law in place, former tax attorney Andy Friedman of The Washington Update is alerting investors and their advisors to the issues that should be top of mind as they file their 2018 returns. During his 30 years as a tax attorney, Friedman served as tax counsel to Major League Baseball, the National Football League and other pro sports leagues. Check out the gallery to see Friedman’s suggestions for handling these issues.
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