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:
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.