An early start on tax planning is always good, but this year it is essential. The Tax Cuts and Jobs Act fully rewrites the tax code effective January 1, 2018. To get the most benefit from the changes, while avoiding mistakes under them, update your tax and financial strategies right away. Here are example areas where action at the start of the year can make a full-year difference:
In 2018, the rate of this tax, which applies to unearned income of children under age 19 (or 24 if a full-time student) may go up– or down. Before 2018, the kiddie tax applied the tax rate paid by the child's parents, but under the new law it applies the tax rates paid by trusts and estates.
Trust tax rates rise fast to reach the new top 37% tax bracket at only $12,500 of income. Married couples don't pay that much until income exceeds $600,000, so now a child may owe a higher tax rate than the child's parents. But trust tax rates start at only 10%, which may be lower than the rate of a child's parents, resulting in a kiddie tax rate reduction.
A child can receive up to $4,650 of unearned income before exceeding the 10% trust rate: $2,100 not subject to kiddie tax plus another $2,550 at the 10% rate. When earning 4% interest, investments may total as much as $116,250 before exceeding the trust 10% rate. (If the child also has earned income it will affect this calculation.)
If the new law will increase your family's kiddie tax rate, you may want to reduce a child's currently taxable income, perhaps by investing for long-term gains. But if it will reduce the rate, you may wish to take gains. You can't know before examining your situation, so do it soon.
One item that can run up kiddie tax liability is receiving taxable distributions from an inherited traditional IRA – a reason to instead fund potential IRA inheritances with a tax-free Roth IRA.
The new law eliminates the deduction for personal casualty and theft losses, except when incurred in a presidentially declared disaster area. Such a loss can happen at any time and, if not in a disaster area, you'll now get no tax recovery from it. This provides good reason to update insurance coverage on all your valuable assets promptly.
Charitable Contribution Deductions
These now have less tax-saving benefit for many. Why? The new law near doubles the standard deduction to $24,000 for married couples and $12,000 for single persons, while eliminating many itemized deductions. The charity deduction is itself an itemized deduction, so you won't get full-dollar deduction value from it unless your other itemized deductions exceed the standard deduction amount.
For instance, a single person who deducts a $13,000 gift to charity while having no other itemized deductions receives only a $1,000 net deduction over the standard deduction amount.
If the tax-saving value of your charitable contributions will be reduced by the new law, consider changing your giving strategy. Perhaps delay donations to "bunch" them in a future year, or get a single large deduction now for donations to be distributed over future years by making a large contribution to a Donor Advised Fund to finance them. If you own a traditional IRA and have reached age 70 1/2, consider making a tax-free qualified charitable distribution direct to charity instead of taking a taxable distribution to fund a gift.
Miscellaneous Itemized Deductions for investment expenses and various other costs (such as legal fees and employee business expenses) are no longer allowed. But if you look at these costs now, you may find alternate ways to cover them that are superior to just writing a now non-deductible check.
For instance, you may be able to pay a fee to the trustee of a traditional IRA by deducting the fee from the IRA balance instead of writing a check. This way the fee will be paid with pre-tax savings instead of post-tax cash, effectively preserving the benefit of the deduction.
These are only a few of the items affected by the new law. Consult with your advisor about how the full law affects you.