5 top tax reform opportunities for individuals

August 14, 2018 4:46 PM

There are no fewer than 130 new tax provisions in the Tax Cuts and Jobs Act, according to Shaun Hunley, a technical editor of PPC products for Thomson Reuters Checkpoint in the Tax & Accounting business of Thomson Reuters, but with tax practitioners starting to focus on helping clients address the act’s impact, he has singled out five major planning opportunities for individuals.

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No. 5: Itemized deductions versus the standard deduction

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The TCJA roughly doubles the standard deduction, but it also suspending personal exemption deductions and eliminates or limits many of the itemized deductions. At the same time, the law temporarily eliminates miscellaneous itemized deductions subject to the 2 percent floor and limits the home mortgage interest deduction to home acquisition debt of up to $750,000.

For your clients, while personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, may result in less tax. Also, you may find that clients who itemized last year won’t itemize this year, or they may be able to itemize for state income tax purposes but not for federal. You will need to run the numbers to assess the impact for each client. Depending on the results, you may need to adjust your clients’ estimated quarterly tax payments or encourage them to turn in a new Form W-4 to their employers.

No. 4: Revisit qualified tuition plans

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Thanks to the Tax Cuts and Jobs Act, earnings in a 529 college savings plan can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. If your clients are paying tuition for their children or grandchildren to attend elementary or secondary schools, encourage them to either set up or revisit their 529 plans. They’ll thank you for it later.

No. 3: Watch out for home equity debt interest

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Under the Tax Cuts and Jobs Act, home equity debt interest is no longer deductible -- or so you thought. According to the IRS, interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. In other words, it’s treated as home acquisition debt subject to the new $750,000/$375,000 limit.

This is good news for homeowners, but it forces you to trace how the proceeds were used. If your client used the cash to pay off credit card or other personal debts, the interest isn’t deductible, even if the payoff occurred prior to 2018.

No. 2: Bunch charitable contributions

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The new law temporarily increases the limit on cash contributions to public charities and certain private foundations from 50 to 60 percent of adjusted gross income. However, the doubling of the standard deduction and changes to key itemized deductions will prevent some clients from itemizing in 2018 and therefore benefiting from this increased limit.

One way to combat this is to bunch or increase charitable contributions in alternating years. Suggest that clients set up donor-advised funds. This will allow them to claim a charitable tax deduction in the funding year and schedule grants over the next two years or other multiyear periods.

No. 1: Maximize the qualified business income deduction

Individuals who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. However, the deduction is subject to various rules and limitations.

Although the official guidance is still being finalized, there are some planning strategies that can be considered now. For example, clients can adjust their business’ W-2 wages to maximize the deduction. Also, it may be beneficial for clients to convert their independent contractors to employees where possible. Other planning strategies include investing in short-lived depreciable assets, restructuring the business, leasing and selling property between businesses, and, yes, even getting married.