How the Tax Cuts and Jobs Act Affects Your Taxes
Changes in Personal Exemptions and the Standard DeductionThe TCJA suspends personal exemptions, which can impact taxpayers who used to itemize their deductions. Meanwhile, certain itemized deductions are suspended. These include work-related moving expenses, some professional fees, investment expenses, and unreimbursed employee business expenses. In addition, the TCJA has increased the standard deduction for individuals. These changes can affect whether you choose to itemize your deductions or take the standard deduction. In some cases, itemizing deductions can save taxes, but the filing is more complicated. With the increase in standard deductions and the elimination of many itemized deductions, you should reevaluate whether you’d benefit more from itemizing or taking the standard deduction.
Updates to the Alternative Minimum Tax (AMT)The changes in AMT, which disallow some deductions and treat certain income items differently (e.g., incentive stock option exercises), will affect a small portion of taxpayers. If your AMT liability exceeds your regular tax liability, you must pay the AMT. If you could be negatively impacted by this update, you should plan for the AMT to minimize your tax exposure.
Changes That Affect Tax Planning for InvestmentsIf you’re buying, holding, or selling any kind of investment, you should revisit your tax planning strategy. Even though the long-term capital gains tax rate remains unchanged under the TCJA, the changes to income tax thresholds and tax brackets could impact the taxes you pay on your investments. Here are a few key changes that could affect your tax exposure:
Income InvestmentsWhen your investments produce income in the form of dividends or interest, you should consider these tax implications:
- Qualified dividends are taxed at the more favorable long-term capital gains tax rate rather than the ordinary income tax rate.
- Interest income is generally taxed at ordinary income rates. As such, stocks that pay qualified dividends may result in lower tax payment than income investments such as CDs and taxable bonds.
- The tax treatment for bonds that produce interest income varies. For example, certain local government bonds are excludable on federal returns, tax-exempt interest from some private-activity municipal bonds could impact AMT, and corporate bond interest is fully taxable.
- If your modified adjusted gross income exceeds $200,000 per year ($250,000 if married filing jointly and $125,000 if married filing separately,) you may also need to pay the net investment income tax, which can include capital gains, dividends, interest, and other investment-related income.
Capital GainsUnder the TCJA, timing can have a significant impact on the amount of taxes you pay on capital gains. For instance, with the right strategy, you can bring your long-term capital gains rate down to as much as 20 percentage points lower than your ordinary income tax rate. The long-term gains rate applies to investments held for over 12 months and remains at 15% for middle-bracket taxpayers. Holding onto your investments until you have owned them more than a year can help substantially reduce tax payment on any gain. Here are a few helpful strategies:
- Use unrealized losses to absorb capital gains.
- Avoid triggering the wash sales rule when selling securities.
- Swap your bonds to achieve tax loss with virtually no change in economic position.
- Avoid mutual funds with high turnover rates that can create income that’s taxable at ordinary income rates.
A Simpler Way to Avoid Capital Gains TaxAlthough there are many strategies to lower your capital gains exposure, they’re often complex and require active management of your portfolio. Not to mention, a slight miscalculation or oversight could undo all the planning and hard work. Thankfully, the TCJA also introduced an investment vehicle that can help simplify your investment while significantly lowering your capital gains tax exposure.
Reduce Tax Payment by Investing in Opportunity ZonesOpportunity Zones were created under the TCJA to;
- Allow U.S. investors to defer all 2018 capital gains for eight years if the profits are reinvested and held in an Opportunity Zone
- Lower the amount of capital gains taxes resulting from the sale of a capital asset by 10% or 15% if the proceeds therefrom are held for five or seven years, respectively, in an Opportunity Zone project.
- Provide for a full exemption from capital gains taxes on all future capital gains on the invested funds if an investment is held for ten years following investment.
*Lifeafar and and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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