We touched on the impact of the Tax Cuts and Jobs Act earlier this year. Click here to see this article. As this tax reform will affect most taxpayers in some way, it is important to understand how the new law may affect you. The Department of the Treasury and the Internal Revenue Service are currently working to provide more detailed guidance on these sweeping changes.
The IRS Priority Guidance Plan provides taxpayers a list of topics for which they plan to issue guidance in their year ending each June 30. The plan can be found on the IRS website and is available for the public to view. We expect more information related to the new Tax Act later this summer, including Qualified Business Income and college savings plans.
Here are some of the new law changes that are on the top of our list.
Beginning with divorce agreements signed after December 31, 2018, the tax reform act removes the requirement that receiving spouses need to include alimony received as income, and also removes the deduction applicable to the paying spouse. This will likely result in a higher overall tax for divorcing couples, but the amount of alimony will reduced by the relevant formulas for agreements signed after December 31, 2018.
Alternative Minimum Tax
The Alternative Minimum Tax exemption and phase-out levels have been increased substantially. Along with the elimination of miscellaneous itemized deductions such as brokerage advisor fees, and unreimbursed employee expenses, as well as the limitation of state income and property taxes, a much smaller group of taxpayers will be subject to this alternative tax.
This results in a push for most taxpayers subject to AMT in recent years: the loss of deductions already limited by AMT. For taxpayers previously outside of the grasp of AMT, the loss of deductions will result in higher federal tax.
While the deductions for charitable giving, cash and non-cash, remain in place, the benefit received from the deductions may be different. The limit on cash contributions has been raised from 50% of AGI to 60%, to give more capacity to donate. However, it is worthwhile to discuss how much you would need to contribute before you start to see a reduction in tax. With fewer overall itemized deductions and the increase in the standard deduction, the timing of your gifts can increase your tax benefit.
Consider bunching your contributions, instead of giving to charity each year, group the amount from each year into a larger contribution every other year, to increase your overall tax benefit.
Donor-advised funds are also an option. These donations which will give you a large deduction in the year you contribute, but allow you control of when the funds are sent to the charities of your choosing.
Lastly, for any taxpayer that is receiving required minimum distributions from their IRAs (401(k) distributions are not eligible), you can elect to make a contribution (up to $100,000) to a charity of your choice directly from the IRA account. The distribution is nontaxable, essentially directly netting the income and the charitable deduction
State Tax Conformity
As the new tax law rules continue to develop and taxpayers gain a better understanding of the affect the new law will have on their federal taxes, it is important not to lose sight of state taxes. Not every state will choose to conform to the new laws. California, for instance, conforms to the Internal Revenue Code (IRC) as of January 1, 2015. This results in a variety of federal and California income and deduction adjustments. It remains to be seen if this conformity date will change. As such, it will be very important to keep track of the conformity rules in the states where you pay taxes.
In addition to conformity issues, a few states are trying creative ways to mitigate the loss of the state tax deduction. For example, CA has proposed to create a charity that would accept donations from resident taxpayers who would receive a credit against their state tax. The result is the conversion of state taxes into charitable contributions. We feel these attempts will fail as the IRS has already indicated they will block these workarounds.
As guidance is released over the summer, it is important to keep your tax planning updated. There are options to help reduce the negative effects, or further increase benefits related to these changes. Please contact us with any questions or concerns related to these updates, and we will be sure to help guide you through the changes and how they will change your tax position compared to prior years. If you have any questions please contact your L&B professional at (858) 558-9200.