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New Tax Reform Opportunities for Personal Planning and Wealth Management

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The 500-plus pages of the Tax Cuts and Jobs Act represent the most significant changes to the tax code in more than 30 years.

While specific provisions of the law have generated headlines, such as lower overall effective tax rates and changes to certain deductions, it is important to take a comprehensive view of how these reforms will cumulatively impact individual tax and wealth management planning. Below, we highlight four considerations for individuals and business owners to keep in mind when formulating their personal strategies for maximizing tax benefits.

Charitable giving

Tax reform’s significant increase to the standard deduction and changes to allowable itemized deductions have created interest for individual taxpayers or pass-through business owners to make the most of remaining itemized deductions, such as charitable contributions. The charitable deduction has always been a flexible and beneficial option for philanthropically minded people to support the causes they care about and reap tax benefits for doing so. In light of tax reform, however, taxpayers must identify the optimal timing and methods of donation to ensure maximum tax savings, which include the following strategies:

Bunching deductions: Prepaying charitable contributions on an “every other year” or “every few years” basis is known as bunching and allows the taxpayer to itemize deductions in the year that the contributions are made and then use the standard deduction in the years when little or no donations are made. This technique is then repeated according to the defined bunching timetable.

Donor Advised Fund (DAF): This vehicle streamlines charitable giving and can be used in tandem with the bunching technique. Here’s how it works: A taxpayer funds the DAF with a larger donation in the first year in order to capture the itemized deduction for charitable contributions. The taxpayer can control when the donations are made from the DAF and spread charitable giving across a number of years. Timing is key here to maximize tax benefits with contributions to a DAF in years when tax liabilities are projected to be higher, so it is important to deploy this strategy with a tax or wealth advisor.

Tax-advantaged

retirement savings plans

Traditional IRAs are funded with pre-tax dollars and withdrawals are taxable as ordinary income after age 59 ½. Roth IRAs are funded with post-tax dollars, which means withdrawals are tax-free after age 59 ½. Both types are subject to income phase-outs and contribution limits.

Given that the choice between a traditional IRA or Roth IRA is essentially a choice to pay taxes now or pay taxes later, it makes sense that this historically low rate environment plays a large role in the decision around which type of IRA to fund.

Previously, individuals in higher marginal tax brackets were encouraged to defer as much income as possible through contributions to a traditional IRA, take a tax deduction for the contributions and then strategically draw down assets in retirement when they are in a lower tax bracket.

Under tax reform, rates are reduced at almost every marginal income level and the standard deduction is nearly doubled until a sunset at the end of 2025. Barring any legislative action to extend or make these provisions permanent, contributions to a Roth IRA should be prioritized during this brief window to capitalize on the lower rate environment, particularly for taxpayers who expect to be taxed at a higher rate in retirement.

Another strategy to take advantage of the current lower rates is the conversion of a traditional IRA to a Roth IRA. Changing from a traditional IRA (pre-tax dollars) to a Roth IRA (post-tax dollars) means that the taxes must be paid all at once during the conversion. The rate reduction and expanded tax brackets, combined with the increased standard deduction, may lower tax payment and allow taxpayers to contribute to the converted Roth IRA at the current lower rates.

Capital gains unchanged,

but AMT raised

While tax reform did not change the rates for capital gains, it did raise the thresholds at which the alternative minimum tax (AMT) kicks in for individuals. Starting in 2018, $109,400 of income for married filing jointly (up from $84,500) and $70,300 of income for single filers (up from $54,300) is exempt from AMT.

As a result, taxpayers may be able to reap greater benefits from capital gains and other income without being subject to AMT. Since a zero percent rate for capital gains is still an option depending on taxable income, individuals should work with their advisors to develop a strategy for maximizing the tax benefits of long-term holdings. Retired individuals may benefit the most from this approach, due to the higher standard deduction and zero percent capital gains rate for certain income thresholds.

Withholding and estimated tax payments

After the passage of the Tax Cuts and Jobs Act, the IRS issued updated withholding guidance and a new W-4 form. Taxpayers in their working years should invest the time to evaluate their withholding positions and adjust as needed with the new tax rate structure. Instead of simply using safe harbor methodology from 2017, taxpayers should consider re-evaluating projected tax liabilities.

It is important to assess the impact of tax reform in the context of individual financial circumstances and goals. The tax and wealth advisors at RKL and RKL Wealth Management take a collaborative and customized approach to planning. Contact the authors below for more information on any of these strategies and visit RKL’s dedicated tax reform resource center at rklcpa.com/taxreform for more information and insights.

Laurie M. Peer, CPA, CFP® is a Partner with the Tax Services Group of RKL LLP and Executive Vice President of RKL Wealth Management. She can be reached at lpeer@rklcpa.com. Ruthann J. Woll, CPA, is a Principal with the Tax Services Group of RKL LLP. She can be reached at rwoll@rklcpa.com.

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