New 2019 Tax Savings Strategies – Adjusting After The New Tax Act

New Tax Savings Strategies for 2019

A little over a year ago now, Congress passed one of the most significant tax reform laws in decades: The Tax Cuts and Jobs Act.

While almost all of us have heard about the Tax Cuts and Jobs Act in the news at some point (whether under its own name or as the “Trump tax cut” or some variation thereof), many people are still confused about exactly what the new law does.

This is to be expected: tax law is complex, and the Tax Cuts and Jobs Act made several major changes. To make matters even more complicated, the act, despite having been signed into law in December 2017, did not take effect until 2018, which means that this year will be your first opportunity to take full advantage of the tax benefits in the new law.

Before you get started on your 2018 taxes, it is vital that you understand how the Tax Cuts and Jobs Act works, and what you should do to make the most of its provisions. That is why we have outlined eight steps everyone should take this year:

Savings Step 1: Review Your Estate Planning.

Analysis of Estate Plan

One of the most important provisions in the new law relates to the estate and gift tax exemption. This applies to non-reciprocal money transfers which occur either during the lifetime of the person doing the giving (i.e. as a gift) or after they have died (i.e. as part of their estate).

The Tax Cuts and Jobs Act has not changed the actual tax rate for the estate and gift tax. However, it has changed the exemption rate: i.e. the rate below which you will not be subject to the estate and gift tax.

Up until the end of 2017, the exemption rate for the estate and gift tax was $5,490,000. If your estate, or the lifetime total of your monetary gifts, was less than this amount, then you were exempt from the estate and gift tax. However, the Tax Cuts and Jobs Act doubled the exemption rate, raising it to $11,180,000 (currently $11,400,000 per person).

This will be a major benefit to you if your estate falls somewhere in between these two numbers, but there are a couple of caveats.

First, the exemption rate increase is not permanent. It is set to sunset at the end of the year 2025, after which the rate will revert back to the pre-2018 level of $5,490,000… unless, of course, Congress passes another law between now and 2025 extending this provision.

Second, the step-up in basis at death has been retained. This means that the estate tax will be factored, not to the value of the assets at the time when they were purchased, but to the fair market value of the assets at the time of the decedent’s death. As a result, if your assets were below the exemption rate when you purchased them, but have since appreciated to the point where they are above the exemption rate, the estate tax will still apply.

Savings Step 2: Take Advantage of the New Corporate Tax Rate.

Corporate Tax Rate Lowering

One of the most significant benefits of the Tax Cuts and Jobs Act is that it has significantly lowered the corporate tax rate for most corporations.
In previous years, the corporate tax rate was bracketed, with the highest bracket being 35%. This gave the United States one of the highest corporate tax rates in the world.

Under the new law, however, the corporate tax rate has been set at a flat rate of 21%. For all brackets except the very lowest, this is a significant reduction… and unlike the estate and gift tax exemption rate increase, the decrease in the corporate tax rate is permanent. It will not sunset in 2025.

This corporate tax cut applies to both C corporations and personal service corporations (PSCs). It does not apply to S corporations, but out next point does…

Savings Step 3: Apply the Qualified Business Income Deduction.

Income deduction of 20%

The Tax Cuts and Jobs Act has created a new deduction, known as the Qualified Business Income Deduction, under Section 199(A) of the Internal Revenue Code.

This deduction applies to qualified business income from pass-through entities, such as S corporations, sole proprietorships, partnerships, trusts, and estates. Taxpayers are eligible for a deduction of up to 20% on this income, although there are certain limitations.

This deduction was intended to offset the corporate tax cut that we just discussed. By cutting corporate taxes so drastically, the government created a huge incentive for businesses to become C corporations. As a result, this deduction was implemented to even the score for S corporations and other pass-through entities.

If you are a business owner who finds the above-mentioned corporate tax cut attractive, you should think carefully and consider the 199(A) exemption before making the decision to incorporate. A pass-through entity may still be the best option for you.

In addition to the 20% deduction on income from pass-through entities, Section 199(A) also provides a 20% deduction on combined qualified real estate investment trust dividends and qualified publicly traded partnership income. This will be of significant assistance to real estate owners.

Savings Step 4: Understand the Standard Deduction Increase.

Deduction Rate Illustration

As one of its central provisions, the Tax Cuts and Jobs Act has significantly increased the standard deduction.

While the standard deduction previously stood at $6,350 for single taxpayers and $12,700 for those who are married filing jointly, the new law has increased the standard deduction to $12,000 for single taxpayers and $24,000 for married filing jointly – a nearly twofold increase for both categories.

What was the purpose of this? Remember, taxpayers have two options when filing their taxes: either they can choose the standard deduction (a single, fixed amount) or they can choose itemized deductions (any number of a list of expenses that the IRS considers to be tax deductible).

By raising the standard deduction, lawmakers were attempting to incentivize taxpayers to use the standard, rather than itemized, deduction. This is meant to make the process of filing taxes simpler and more straightforward overall, and reduce the costs associated with filing taxes (which are a not-insignificant burden on the economy in and of themselves).

If you used itemized deductions when filing your taxes in previous years, you may want to consider switching to the standard deduction for 2018.

Of course, it may be that the sum total of your itemized deductions is still larger than the standard deduction. However, there have been some changes in that area of the tax code as well…

Savings Step 5: Plan for Certain Tax Exemptions That Have Been Repealed.

Exemption graphic

In order to make room for the increase in standard deduction, many tax exemptions have been repealed. While this simplifies the tax code as a whole, it may make things more difficult for you, depending on your personal situation.

One of the most important of these is the new limit on the State and Local Taxes (SALT) deduction. Previously, taxpayers were allowed to deduct all of their state and local taxes, including either income or sales tax as well as property tax.

Under the Tax Cuts and Jobs Act, however, SALT deductions have been capped at $10,000.

This burden will not fall on all taxpayers equally. It will be hardest on a few classes of taxpayers, including people with higher incomes and people living in states and localities with the highest taxes. That includes our own beloved state of California, where the state income tax is 13.3%.

If you live in California and are dismayed by this new rule, then you may want to consider setting up a Nevada Incomplete Gift Non-Grantor Trust (NING). While trusts are generally subject to income taxes in your home state, if you set up a trust in Nevada and follow certain rules, then it will be subject to Nevada’s state income tax instead, which is 0%.

The mortgage interest exemption was also affected by the Tax Cuts and Jobs Act. Previously, the exemption applied to interest payments on up to $1,000,000 of acquisition indebtedness (i.e. the money you borrowed in order to buy your home). The new law lowered the exemption to $750,000.

However, it is important to note that this does not apply to mortgages taken out before December 15, 2017. If your mortgage was taken out before that date, you will still be allowed to deduct interest payments at the former, higher level.

Savings Step 6: Be Aware of the New Limits on Cash Charitable Donations.

Limit on a charity

The Tax Cuts and Jobs Act has not eliminated the deduction for charitable contributions. However, it has increased the exemption limit for cash contributions to charity.

Previously, you were allowed to deduct the full amount of your cash contributions to charity so long as they did not exceed 50% of adjusted gross income. However, this limit has now been increased to 60%, making it simpler for you to give a larger portion of your income to charity.

This is one of the few ways in which the act makes it easier, rather than harder, to take out itemized deductions. However, this may be somewhat offset by the other limits on itemized deductions and the standard deduction increase.

Savings Step 7: Alternate Your Itemized Deductions.

Alternation graphic of deductions

Since using the standard deduction has just been made much easier, and itemized deductions have been made much harder, by the new tax law, it’s likely that you’ll want to choose the standard deduction. This was, after all, the intention of the law, and most tax experts expect the number of Americans opting for standard deductions to increase dramatically.

However, you may still find it in your best interest to use the itemized deduction some years, if you plan carefully. By bunching your itemized deductions into every other year, you can maximize the amount you save in taxes while still getting most of your itemized deductions.

There are a few different deductions that may be bunched. One of these is charity: rather than donating the same amount every year, you can donate twice that amount every other year. The same goes for medical procedures: some, of course, are urgent and cannot be delayed, but if there is an elective medical procedure, then you can choose to have it in the year you do itemized deductions.

Finally, you can arrange to pay ahead on your property taxes.

By putting all of these expenses together every other year, you can far exceed the standard deduction cap in those years, even if these expenses would not have exceeded the standard deduction cap if you had not bunched. In off years, you simply use the standard deduction.

This is a simple way of saving on taxes, but it works! Many taxpayers use this method already, but after the Tax Cuts and Jobs Act, it is more advantageous than ever.

Savings Step 8: Protect Personal Property via a Deferred Installment TrustGraphic of sold property to save taxes

Up until 2017, Section 1031 of the Internal Revenue Code allowed taxpayers to switch one piece of investment property for another without paying capital gains tax.

Section 1031 is still in effect under the Tax Cuts and Jobs Act. However, the new law has narrowed this provision so that it can only be used for real estate, and not for personal property (i.e. property that can be moved from place to place).

This will make it more difficult for you to save money on the capital gains tax, but you can get around this via a deferred sales trust. By placing your property in a deferred sales trust and allowing the trust to sell the property on your behalf and hold the proceeds from the sale, you will be able to defer the capital gains tax for a long time, potentially indefinitely.

Although many investors are not aware of the benefits of a deferred sales trust, this is an excellent (and fully legal) method of circumventing the capital gains tax without being forced to invest in real estate.

TAXMAX Savings Program Explained

The best tax savings strategies for 2019 come to those who qualify and sign up for our TaxMax Savings Program.

The TaxMax Savings Program allows for individuals to sit down with some of the best tax attorneys and CPAs in California for a custom tax savings review to ensure the most savings possible.

For those who qualify, TaxMax guarantees a savings of at least $10,000 on your taxes or your sign up will be refunded.

For more information or to see if you qualify for the TaxMax Savings Program, click on the button below.

TaxMax Button to Apply for Savings
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Call Ben Schwefel at 714-384-6580

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