Understanding the Real Impact of Tax Reform

February 20, 2019
Sarah D. Buenger, MPAS®, MSPFP, CFP®
Director of Financial Planning

The true impact of tax reform varies by family and will continue to be revealed through the 2019 tax filing deadlines.  At first glance, some families do not experience a tax reduction at all, but rather, an increase under the new laws. For example, a family of 5 with $14,000 in itemized deductions will lose $20,250 in personal exemptions and the $14,000 in itemized deductions while picking up $24,000 in standard deduction and $6,000 in new child tax credits for a net INCREASE to taxable income upon which the credit is taken.  The overall impact is a tax increase, not tax savings as is broadly publicized.

The Fidelity article referenced in our newsletter does provide a nice summary of the actual impact of tax reform for retirees, age 65 or older, who are already drawing Social Security.  Notably, the overall impact to retirees will be an increase in the use of the standard deduction. However, instead of blindly taking the standard deduction, it is still well worth the effort to utilize tax strategies like bunching itemized deductions every other year.  
Carrying on with example two from the Fidelity article, if the fictional couple with itemized deductions worth $18,000 were to implement a bunching strategy, they could essentially shift the timing of their itemized deductions so that they can do standard in 2018, itemized in 2019, standard in 2020, and so on.  Examples of ways to do this follow:

• Reserve elective procedures like lasik eye surgery or braces for an itemized year to see if total medical expenses will surpass the 10% of AGI threshold for 2019.
• Pay two years’ worth of property taxes in the same calendar year.  Property tax statements are mailed out around October. Reading the fine print on the statement reveals that no penalty is due as long as payment is received before the end of January.  Thus, a taxpayer can pay property tax in January 2019 and also October, November or December of 2019, doubling the property tax deductible. Unfortunately, property taxes fall into what is referred to as the SALT taxes or State and Local Taxes.  There is a new overall cap of $10,000 on all SALT taxes from now to December 2025. For those residing in Texas, this would be your property tax and your local sales tax.
• Reserve charitable intentions for itemized years.  Although not ideal for the charity, a taxpayer could reasonably give double the gift amount to their chosen charities during an itemized deduction year and nothing during a standard deduction year.  This is not to be confused with a Qualified Charitable Distribution (QCD) which is available to taxpayers over the age of 70.5. A QCD allows a gift of the required minimum distribution from a retirement account directly to the charity.  Gifts through a QCD are excluded from income already therefore no additional deduction is allowed in the itemized deductions.
• Interest on a mortgage up to $750,000 is still deductible through 2025 for those who itemize.  Although you can’t feasibly alter when mortgage interest is paid, if you plan to sell or purchase a principal residence, reserve the transaction for an itemized year when possible since some of the costs of closing are deductible.  Of course, if circumstances dictate, then don’t let the tax tail wag the dog. In other words, if saving the transaction for an itemized year would be financially detrimental in other ways, don’t do it.

​These are just a few examples that could allow our fictional couple to take the standard deduction for $26,600 in one year then potentially as much as $36,000 itemized deductions in the bunching year.  In summary, it is still worth the tax planning to try to itemize. Before implementing any of the methods discussed above it is recommended that you have a conversation with your tax professional and financial advisor to be sure the strategies are beneficial to your specific situation.