Now that you have likely received all your W-2s, 1099s and other tax forms, you may have recently filed your 2018 income taxes or are in the process of preparing your returns.  You may have filed returns that have varied little for as long as you can recall, but given that this is the first tax filing season under the new Tax Cuts and Jobs Act rules, reviewing and understanding your tax return can be very instructive to your tax planning for 2019 and beyond.

How the new standard deduction affects you

The area that will affect the most people is the increase in the standard deduction, which will reduce the value of many deductions that were beneficial in reducing past taxes.  Given the $10,000 annual limitation of state and local taxes (“SALT”), many people in high income and property tax states like New York and California may lose tens of thousands of dollars in deductions.  For example, if you are a high-earning couple paying a 6% state tax on $500,000 of income in addition to paying $20,000 in property taxes, that’s over $50,000 that you were able to deduct from your federal taxes prior to the TCJA.  Ouch!  With your SALT limited to $10,000 and a standard deduction of $24,000 for married couples filed jointly, you need a fair amount of deductible mortgage interest, charitable contributions and other itemized deductions to get any tax savings from all those taxes and expenses.

Another area to pay attention to is your charitable contributions.  While not countering the altruism inherent in your giving, it sure was nice to have the government effectively subsidize a portion of our generosity through our ability to deduct qualified contributions.  If you now take the standard deduction, that tax savings value is lost.  If your total itemizable deductions are close to your standard deduction, you may want to lump your donations every other year (you can write checks in January and December every other year) so that you can get some tax savings from your generosity.

Capital Gains and Losses

Have a look at Schedule D “Capital Gains and Losses” to see if you have any capital loss carry-forwards.  You are only allowed to deduct $3,000 of capital losses against your other current year’s income and the balance of losses, if any, can be used to offset capital gains in future years.  A thoughtful investment manager can use this information to potentially lower your taxes on capital gains for years to come.  Long-term capital gains tax rates are considerably lower than short-term rates, thus providing an experienced investor tax-harvesting and tax-deferral opportunities to maximize your after-tax investment returns.

Maximize your contributions to retirement and education savings accounts

Income taxes are a high-class problem; if you are making lots of money, you are likely paying lots of taxes.  If you are not self-employed, take advantage of any company-sponsored retirement plans, especially those with matching contributions.  Depending on your income, you or your spouse may be able to contribute to an IRA as well.  You can open and contribute to an IRA up until your tax-filing deadline.

If you are self-employed, there several retirement plan options including SEP IRAs, or if you have no employees, a Solo 401(k), among others.  The SEP IRA will allow you to contribute up to the lesser of $56,000 or 25% of compensation for 2019.  The Solo 401(k) has different rules, but you may be eligible to put away up to $56,000 and potentially another $6,000 more if you are older than 50.

Do you have children or grandchildren that you hope will eventually go to college?  Opening and contributing to a 529 can get you a break on state taxes in many states, including New York and earnings on investments are not subject to tax.  There are many rules, including potential penalties or tax-recapture for early or non-allowable withdrawals, so it is wise to understand how the funds can and can’t be used.

There are many additional opportunities that proper tax analysis and planning can create, so it is always a good decision to speak with a tax professional and financial advisor to help incorporate tax planning into your comprehensive financial plan.

Please feel free to contact me if you’d like to set up an appointment to discuss your financial situation.

Stephen Lulla
Founder, Chief Investment Officer
steve@maidstone-wm.com
518 350-4877 (o)
10 West Main Street
Cambridge, NY 12816