The U.S. tax code is always evolving, and the 2017 Tax Cut and Jobs Act made significant changes that will impact all taxpayers. Many forward-looking analyses anticipate a lower tax liability for most individuals. That does not mean, however, that paying taxes has become a simplistic endeavor. Indeed, the new law does not change the fundamentals of saving, positioning assets toward achieving the lowest tax bill possible, and taking a careful approach to preparing for taxes toward achieving or preserving financial independence and for some, the tax efficiency of their retirement income.
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What’s New for 2018 Filings?
The new tax law is a weighty piece of legislation. While there are numerous implications from the new law, the likely impact on income taxes can be distilled into four primary areas.
- Lower income tax rate (probably): Whether filing individually or jointly, most Americans will see their income tax rate decrease, due to changes in the tax brackets. The taxable income ranges are somewhat different, and the tax rate was reduced for most taxpayers. This structure applies to ordinary income (e.g., wages, interest, most IRA withdrawals).
- Standard deductions double: For single filers and married joint filings, the standard deduction has increased to $12,000 and $24,000, respectively. But at the same time, it repeals the personal exemption deduction, which was previously a set amount deducted for every taxpayer and most dependents.
- SALT is capped: The law reduces the amount taxpayers can deduct from their federal return in state and local property and income taxes (SALT) to $10,000. While this smaller amount could impact any taxpayer, it is likely to have the greatest impact on individuals with incomes exceeding $100,000.
- Miscellaneous deductions are gone: The new law eliminates all miscellaneous deductions, which include tax preparation, dues and subscriptions, job searching and unreimbursed employee expenses.
The full impact of the new tax law may not become certain until it has been in effect for some time. Meanwhile, prudent savers and investors can take proven strategic steps to ensure their tax bill is as low as possible.
When it comes to investing and planning for long-term financial independence, there are several areas where a smart approach to wealth and saving can make a big difference in how the federal government taxes different kinds of assets and holdings. Consider these areas when contemplating a wealth strategy.
Timing earnings receipt: Not everyone can control when they receive their earnings. For those who can, it is sometimes possible to avoid climbing into a higher tax bracket during a year of limited taxes by delaying a payment until the following tax year. Retirees, for example, may take IRA withdrawals early in a low tax year in order to limit a higher tax bill in succeeding, more lucrative years.
Using different account structures: Strategically placing money in taxable, tax-deferred and tax-free accounts can make a big difference in the government’s end-of-year bill. Investment types can have varying tax rates, and a prudent, educated taxpayer can keep low-yield holdings in taxable accounts and high-yield funds in accounts where taxes can be deferment or otherwise limited.
Lowering RMD: Retirement account holders who are more than 70 years old face a required minimum distribution (RMD) every year. A large RMD could ratchet a taxpayer into a higher bracket, but by converting Traditional IRA holdings into a Roth IRA, the taxpayer can reduce their RMD. This is a “taxable event,” but if done during a low-tax year, it can be an effective tactic for limiting taxes due.
Finding the investment silver lining: While smart investing often leads to yield, not every investment ends up producing. You should keep track of your investment losses, as short-term losses can offset long-term or short-term gains and you can carry them forward indefinitely. Individual taxpayers are also permitted a deduction of up to $3,000 of investment losses per year against ordinary income.
Gifting to save: Gifting can help reduce gains, secure tax deductions and potentially lower one’s tax bill. The annual gift tax exclusion allows a taxpayer to gift anyone (family or friends) up to $15,000 per year. What is more, the lifetime estate and gift tax exemption (which can be used at any point in your life) has risen to $ 11,180,000 in 2018. For individuals involved in philanthropy, consider furnishing a gift in the form of an appreciated investment (e.g., donating investments imbedded with gains, rather than a lump sum).
To be sure, adjusting account structures and taking strategic steps to lower tax liability is a nuanced, often complex endeavor. Investors should turn to their financial advisors and tax professionals to develop the most lucrative and cost-saving wealth strategy. With the right guidance, education and initiative, taxpayers can preserve their financial independence, no matter how the tax code changes.
This information is for general use with the public and is designed for informational or educational purposes only. It is not intended as investment advice and is not a recommendation for retirement savings. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
Loic LeMener, CFA®, MBA, CFP® is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker-dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies This information is for general use with the public and is designed for informational or educational purposes only. It is not intended as investment advice and is not a recommendation for retirement savings. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
Loic LeMener, CFA®, MBA, CFP® is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker-dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies CRN-2155499-061918. Opus Wealth Management is not an affiliate of Lincoln Financial Advisors Corp.
About the Author
Loic LeMener is the founder and President of Opus Wealth Management in Dallas, Texas, a boutique wealth management firm that specializes in personalized client solutions. Loic and his team provide their clients with a targeted needs evaluation to answer important questions that provide a better, more personalized experience. The team focuses on integrity and believes in the following “golden rule” – they won’t do anything for you that they would not do for themselves or their loved ones.
Loic received his Masters in Business Administration from Southern Methodist University, studying Finance, Accounting and Portfolio Management. He also earned the Certified Financial Planner™ certification and the prestigious Chartered Financial Analyst® designation. In addition, he has been quoted in national publications such as Barron’s.
In his free time, Loic is a devout reader, with his favorite topic being “value investing.” His favorite investors are Warren Buffett, Ben Graham, Charlie Munger, Seth Klarman, Howard Marks, and Jeremy Grantham.
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