Personal Finance

Three Questions You Should Ask Your Tax Preparer This Year

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, introducing fundamental changes to the Federal tax landscape for both individuals and businesses.



The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, introducing fundamental changes to the Federal tax landscape for both individuals and businesses. Some of the biggest changes impacting individuals include a comprehensive adjustment of the marginal income tax brackets that effectively lowers tax rates for many, an increase in the standard deduction that will reduce the number of taxpayers that itemize their deductions, and a sweeping set of changes to itemized deductions themselves that may have a variety of impacts.

Three questions for your tax preparer
As you begin to gather your records and prepare to file your personal taxes under this new tax law, here are three questions you should consider asking your CPA or tax preparer as you begin the process.

#1: Should I pay down, increase, or entirely eliminate my mortgage or home equity debt?
One of the big changes in the TCJA was the reduction in qualifying interest payments toward mortgage debt over $750,000, from the previous limit of $1 million, for new mortgages taken out after December 16, 2017. Additionally, the Act eliminated the deduction for home equity indebtedness. Combined with the near doubling of the standard deduction, this means that you may no longer be able to realize a tax benefit for your current home equity and mortgage debt, increasing the effective interest rate you’re paying for this debt.

Based on your personal level of indebtedness, the interest rates on your loans, and whether you’re itemizing or taking the increased standard deduction, your tax preparer should be able to help you calculate the new effective rate of your mortgage and home equity debt.

Depending on your personal situation, there may be an opportunity to refinance existing home equity debt into your mortgage if it results in a benefit from itemizing your deductions. On the other hand, if there isn’t the opportunity to itemize deductions, depending on the rate of return of your investments, you may want to consider the potential impact of reducing or eliminating your mortgage debt.

#2: Should I bundle several years of charitable contributions together into a single tax year?
The aforementioned increase in the standard deduction and the limits on home equity debt, combined with a new $10,000 limit on deductibility of State and Local Income taxes, means that the tax benefit of charitable contributions may also be limited under the TCJA. If the total of all of your itemized deductions, including your charitable contributions, is less than, equal to, or even just barely more than the revised standard deduction amounts, you may want to consider whether bundling several years of charitable contributions together could increase your realized tax benefit.

Depending on your individual tax situation, including, among other things, your income level, amount of deductions, marital status, and charitable intent, your tax advisor can calculate whether this makes sense, as well as when and how much you might consider bundling into a single tax year. Your financial advisor can help set up a Donor Advised Fund in order to facilitate.

#3: Should I consider making changes to assets currently titled in my children’s name?
One of the lesser noted changes implemented in the Tax Cuts and Jobs Act is the changes made to the so-called “kiddie tax” provision, where a child’s investment income in excess of $2,100 is charged at higher rates. Previously, earnings subject to these kiddie tax provisions were taxed at the parents’ tax rates. This meant that moving income producing investments into a child’s name would result in the first $2,100 of that income being taxed at a lower rate, then the remainder being taxed as if the parent owned the investment. This provided a marginal benefit for families.

For 2018 and beyond, income in excess of the kiddie tax limit will now be taxed at the higher rates that apply to trusts and estates.

At first glance, it may seem that the new rules will trigger higher tax bills in relation to the kiddie tax than in the past. This is not necessarily the case, depending on the amount of income subject to the kiddie tax and the parents’ marginal tax rate. Your tax preparer should be able to look at your personal situation and provide a comparison of the tax impact before and after the TCJA, as well as give you some indication whether you should consider reallocating funds to produce less investment income in your child’s name.

Given the new tax legislation and its impact on individuals in 2018 and beyond, these are just a few suggestions for your conversation this year with your CPA or tax preparer. Changes to tax rules means new opportunities for maximizing your income and investment allocations. Contact us today to find out more ways we can help optimize your financial situation.

This does not constitute tax, legal, or accounting advice. For tax, legal, or accounting advice, please contact the appropriate professional.

This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within.

Martin Schamis, CFP®
Head of Wealth Planning
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Schamis is Head of Wealth Planning for Janney Montgomery Scott, a regional brokerage firm based out of Philadelphia, PA with more than 800 Financial Advisors located across 110 offices. In his current role, Martin is responsible for developing and leading the strategic direction of financial planning and trust services for the firm’s retail client base. This has included the successful launch of a new financial planning technology platform designed to keep people at the center of the financial planning process. Prior to joining Janney, Martin was with The Vanguard Group where he served in a variety of roles primarily focused on financial planning initiatives. This included redesigning Vanguard’s comprehensive financial planning offering, developing a solution connecting clients with Vanguard’s CFP® Professionals for situational advice, and improving the efficiency of their retail operations center. Prior to Vanguard, Martin worked as an advisor for Morgan Stanley. Martin is a member of the CFP Board of Directors, is a CERTIFIED FINANCIAL PLANNER™ professional, and holds FINRA Series 7, 66, and 24 licenses. He graduated with a Bachelor’s degree in Physics and Art from the University of Delaware and received a Master of Business Administration in Finance from St. Joseph’s University.

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