While President Donald Trump signed tax cuts into law in December, most of the changes will affect next year’s returns. That means everything from changes to deductions to credits will all need to be accounted for when taxpayers file a year from now.
Here are some of the main items taxpayers can start thinking about to get ahead of the game.
The new law doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. That means a lot more Americans will be taking the standard deduction instead of itemizing.
“Before the change, it was about two-thirds, like 70%, of people taking the standard deduction,” Speiss says. “That’s inching closer to 95% of people taking the standard deduction [now] … Overall it helps make tax preparation easier … less things that [filers] need to stress in the first place.”
People who will still be itemizing shouldn’t be overly concerned, Speiss adds, because the only thing that has really been curtailed is state and local tax (SALT) deductibility.
State and local tax deduction changes
Under the new law, state and local tax deductions will be capped at $10,000 – a major point of controversy for residents in high-tax states such as New York and California.
But some residents who are losing out on this deduction may not be hurt as severely as they might think. That’s because high-income filers subject to the alternative minimum tax, or AMT, haven’t been able to benefit from SALT deductions.
“They’re really not getting the deduction anyway,” Speiss says. Still, the SALT changes will accelerate some individuals’ decisions to move to lower-tax states, Eric Bronnenkant, head of tax at Betterment, told FOX Business.
The change, Speiss says, could cause individuals with multiple residences to shift where they spend most of their time in order to change where they claim primary residence. He warns that auditors in such states as New York can be aggressive, monitoring everything from cell phone tower logs to toll receipts.
Retirement planning and contribution
Retirement plan contribution limits were largely unaffected by changes enacted under the Tax Cuts and Jobs Act. The contribution limit for 401(k) accounts was raised by $500 to $18,500, from $18,000.
One change that Bronnenkant says his clients have been less enthusiastic about is the characterization of IRA contributions. Individuals who are contributing to an IRA have the option of converting the funds into a Roth IRA. Under previous law, they had the ability to undo that decision by a deadline in order to avoid taxes, a move known as recharacterization. The new law, however, prohibits individuals from such changes in Roth IRA conversions beginning in 2018.
“Electing a conversion [is] an irreversible event … so you want to be more certain about your decision now,” Bronnenkant says.
Qualified business income
Speiss notes that investors should take advantage of the retirement plan’s contribution limits and also keep in mind that business owners can benefit from a new deduction. The qualified business income deduction can be claimed by some self-employed individuals and is limited to the lesser of 20% of qualified business income or 50% of the total wages paid by the business.