Tax reform drives change in planning

Tax reform drives change in planning

Individual taxpayers may consider changing their tax-planning strategies due to the shifting tax landscape under the Tax Cuts and Jobs Act.

Reductions in tax rates as well as limitations and the repeal of certain deductions may lead some investors to re-think their approach to tax-efficient planning.

Chris Hennessey discusses how the new tax law affects individual financial planning and offers some planning strategies for individuals who are accustomed to itemizing deductions. Investors must first consider their new marginal tax rate and whether or not they will owe the alternative minimum tax.

While the standard deduction is nearly doubling, the tax reform law sets limits on the mortgage interest deduction and the state and local tax deduction, while eliminating miscellaneous 2% deductions and the personal exemption.

Planning considerations include:

  • “Bunching” charitable donations. If a couple’s itemized deductions, including donations, total less than the new standard deduction, they would miss out on the charitable deduction. Instead, consider skipping a year or two and bunching charitable donations to exceed the standard deduction and have the ability to itemize.
  • Charitable IRA rollover. A special provision of individual retirement accounts allows individuals age 70½ to direct up to $100,000 annually from an IRA directly to a qualified charity and avoid reporting these funds as income.
  • Roth recharacterization repealed. The new law eliminates the ability of investors to reverse — or recharacterize — a Roth IRA conversion. Before choosing to convert a Roth IRA to a traditional IRA, investors should do a careful calculation.


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