Ter Claeys, CPA
The Tax Reform and Jobs Act (see our November blog for an in-depth overview) means that some individuals who itemized in the past won’t itemize if their total qualifying deductions are below $12,000 ($24,000 for married ). Many clients have expressed concern that they might lose out on some tax deductions.
In this article, we'll provide some strategies to maximize your write-offs, including charitable contributions, improvements to your house, tax incentive credits, and how to limit (or eliminate entirely) capital gains if you sell your home.
Due to the increase in the standard deduction, you might think you would seemingly lose some of the tax benefits of your charitable deductions. To explain, assume a married couple has $6,000 of mortgage interest and is capped at $10,000 of deductions for their property taxes and state and local taxes. With the new standard deduction level at $24,000, this couple would receive no tax savings from the first $8,000 of charitable contributions. But there's a way around this limitation! If this couple instead bunches their donations in alternate years, they could itemize their deductions every other year and get the benefit. Over the two-year period, the couple generates an additional $8,000 in tax deductions. If the couple falls in the 32 percent tax bracket (with taxable income over $157,500), bunching would provide a permanent tax savings of $2,560. Another option is a donor advised fund (DAF). A DAF allows you to give in one year, but spread the actual grants made to charities over several years. This option allows your favorite charities to receive a donation from you every year, while you take the full deduction in the year you fund the DAF.
If you own a house, the day may come when you will eventually sell your home. Many individuals are aware that there’s a capital gains exclusion of $250,000 ($500,000 if married) on the sale of a home if they resided in that home as their primary residence for two out of the last five years. However, many individuals who have owned their home for a moderately long time may have experienced a significant increase in the market value of their home. Many homeowners can escape or significantly reduce capital gains tax by accounting for every improvement made to their home. A new roof, siding, windows, kitchen/bath remodel and even landscaping improvements are all capital improvements and can easily add up to $50-100K plus. My advice is to dig up old invoices, receipts, county permits, etc. to capture the total cost for your records. Save this information so that we can report it when we prepare your return for the year in which you sell your home.
Where the total cost of improvements to your house can help you reduce or eliminate capital gains tax, the sales tax you paid for materials and items for the house are deductible. For any improvements or repairs to your home, keep the sales receipt and tally up the sales tax paid for all materials purchases. If you hired a contractor, have them break out the cost of the materials vs. labor on the invoice(s) and then request the sales tax amount paid for the materials. Many contractors won’t automatically do this, so make this specific request when they create the final invoice. Our tax questionnaire will have a question about this topic to help you remember to gather this information.
In general, registration fees paid for vehicles are not deductible if the fee isn't based on the value of the vehicle. However, residents who are taxed for regional transit on their vehicle registration can deduct that particular tax. For example, some county residents in Washington State are charged a regional transit authority (RTA) tax that is based on the value of their vehicle. If you paid this tax (or similar tax in your county or state), dig up your registration documents and provide the information to us.
If you’re in the market for an all-electric car and home battery charger, planning is key. Many of these purchases qualify for a prized tax credit up to $7,500. A credit is prized because it’s a dollar-for-dollar tax reduction. However, many buyers get caught off guard when claiming the credit because they were unaware that there is a maximum tax credit allowed on a given tax return. A simple solution is to straddle your electric car and home battery charger between two tax years; e.g., December and January, respectively.
For example, if you are planning to purchase a new electric car, make the purchase in December and then purchase the home battery charger the following January. The two items in themselves are oftentimes below the maximum allowable credit, meaning you can claim the maximum credit for the car on your 2018 return and the battery on your 2019 return. Bonus tip: If you’re not in the market for an electric car, keep in mind that you may still deduct the sales tax you paid for a traditional new or used vehicle purchase.
The biggest change introduced by the tax reform law provides individual owners of sole proprietorships, rental properties (and certain other entities such as S corps, partnerships, etc.) to deduct up to 20% of their income earned from those entities. If you’re not a business owner, don’t overlook this deduction if you own rental property and have tenants. The regulations to claim and report this deduction are exceptionally complex to summarize in this article. But don’t fret! Our Tax Questionnaire will have a section that ensure we obtain the necessary information to take the deduction for you.
Most individuals don't think about taxes until tax season, and thus seek out a tax professional during the most hectic time of year—tax season. This particular time of year is when most tax preparation firms reach their maximum capacity and are no longer able to take on new clients for April filings. If you have friends or family planning to engage a professional tax preparation firm, my biggest piece of advice is to consult with them now. In fact, meeting now is an opportunity to make strategic tax decisions during the tax year (you can’t change history if you wait till tax season!). So make some calls now and get acquainted in a relaxed setting when the CPA or EA has time. Many firms (including us) offer complimentary consultations to discuss needs and can offer a pre-engagement.
Finally, and most notable is that despite early on claims that tax returns would be simplified, and most taxpayers would file on a postcard, the actual outcome resulted in even greater complexity. Tax law is exceptionally complicated and can’t be fully explained in this post.
Again, we don’t expect you to be tax experts—that’s our job! Instead, we simply need to be aware of what occurred for you during the year. We’ll be asking you to complete the simplified tax questionnaire. Completing this questionnaire is your assurance that we’re aware of qualifying events that provide deductions and credits. The form takes about 10 minutes to fill out. It’s that simple!