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1. Consider the standard deduction
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With the elimination and reduction of certain itemized deductions, some clients who may have itemized in the past might do better to take advantage of the higher standard deduction which now is $12,400 for single filers and $24,400 for joint filers.
2. Remember to count the kids
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The child tax credit has doubled to $2,000 for each dependent under age 17, making this a critical tax-savings area for clients with children. The higher tax credit also benefits more people, since it does not phase out until income exceeds $400,000 for joint filers and $200,000 for single filers. That’s an increase from $110,000 and $75,000, respectively.
3. Max out on retirement
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Increasing 401(k) contributions to the $19,000 maximum allowed by year’s end can help reduce taxable income. Also remember to contribute the $6,000 maximum (for those under age 50) to individual retirement accounts—and ensure that nonworking spouses do the same.
4. Play catch-up
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For those ages 50 and older, contribution limits for IRAs and 401(k)s are even higher, at $7,000 and $25,000, respectively. These higher limits help clients build up their retirement nest egg and can help reduce taxable income.
5. Sock away dollars for doctors (and other qualified health expenses)
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Those participating in a high deductible health plan can contribute up to $3,500 (singles) or $7,000 (family) to a health savings account. If not from a pretax payroll deduction, HSA contributions from a client’s funds are tax-deductible, and the money can be withdrawn tax-free to pay for a variety of medical expenses. Importantly, if the money is not used, the account balance continues to grow tax-free.
6. Bank the house
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For those clients who will still itemize deductions, mortgage interest is deductible up to $750,000 of debt. And the interest on existing mortgages originated on or before December 15, 2017, is deductible on debt up to $1 million.
7. Donate your extra dollars
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Charitable deductions continue to be deductible for clients who itemize.
8. Make medical expenses count
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Medical costs are deductible if they exceed 10% of adjusted gross income—up from the 7.5% threshold in 2018. This means some taxpayers will be deducting less of their medical expenses than in the past.
9. Your taxes, now with less SALT
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State and local taxes (SALT) on income, sales and property are still deductible, but now capped at a total of $10,000 combined. This means a widely used year-end planning strategy of prepaying income and property before December 31 will benefit fewer people.
10. Deduct by the bunch
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Deduction bunching has become more popular. With the standard deduction so much higher, many taxpayers won’t receive a tax benefit from charitable contributions, property taxes, mortgage payments and medical expenses. Some clients, particularly those in higher income brackets, however, may be able to take advantage of “bunching”—essentially doubling up on certain costs one year and simply taking the standard deduction another year. Also, donor-advised funds will likely become more popular where the taxpayer gets a deduction by itemizing in the year a contribution is made to the fund and then direct distributions from the fund to charities in subsequent years.
11. Don’t let investments drag you down
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Taxes on capital gains and qualified dividends remain unchanged—and pose a hidden risk for many clients. Annual taxes on capital gains, dividends and interest could add significant drag to a portfolio’s long-term performance, and that drag will be greater for actively managed portfolios with a high turnover ratio. This could result in a lot of short-term capital gains being distributed to the investor each year, leading to tax rates as high as 40.8%, including the 3.8% Medicare surtax.
To add insult to injury, especially during periods of high volatility like we have seen over the past year, many investors could receive a taxable distribution even though they experienced a market loss in their overall investment portfolio. Fortunately, clients can harvest their losses by selling the losers in their portfolios, deducting up to $3,000 in losses from their ordinary income.
12. Check it twice—for AMT
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Fewer taxpayers are likely to be subject to the alternative minimum tax (AMT) thanks to a combination of the higher standard deduction, increased AMT exemption ($71,700 for single filers; $111,700 for joint filers), and increased phaseout of those exemptions ($510,300 for singles; $1,020,600 for joint filers). Yet, the tax law still requires calculating tax liability twice, once under the regular tax code and again under the separate AMT rules, to determine total tax liability.