The New Tax Law: Control the Controllables
"Control the Controllables".
In financial planning, there are many things that you cannot control the movement of the market, the cost of healthcare, new tax legislation, etc. But, your reaction to these uncontrollable facets of the financial world, and how you prepare for them in the future, is well within your control. So today, we wanted to take some time to discuss some of the most discussed changes that affect you, and how you can react in the most advantageous way in response to them.
1. Reductions in the Top Tax Rates
For those who are in the top tax brackets, and for those who have pass-through companies, the potential for income taxes to be lowered is very high. The tax changes may lower the rate by several percent for these top earners, allowing them to keep much more of their money than they were able to under previous tax plans. This will help the wealthy, along with those who own specific types of businesses.
2. Itemized Deductions Are Changing
Being able to itemize more deductions and see a lower tax payment because of that means that people who traditionally itemize can save money with the new tax plan. Not everyone itemizes, and those who do generally do so because they have enough deductions to lower their taxes beyond what the standard deduction would. But with the opportunity to itemize more deductions, there can be an even larger tax savings.
3. 529 College Savings Plans Have More Flexibility
Homeschooling, public, religious, and private schools are now eligible when it comes to how parents can use 529 funds for their children. In the past, they were only able to use these funds for college, but with the expansion of their options they can better provide an educational experience for their children. There are still limits, but the expansion of those limits could provide value to many families.
4. Taxes for Estate Planning Have Been Adjusted
Now the threshold at which the estate tax takes affect has been doubled. That means there will be fewer needs for trusts and other vehicles to lower the estate amounts that are paid to heirs. Instead, more money can simply go to heirs without that money being taxed. That will help the wealthy transfer more of their wealth to their children and others without the need to pay as much of it in taxes.
How to React to These Changes
The biggest concern for most Americans is how they should respond to these changes in the tax law. For some people, there is basically nothing to respond to because the changes really have very little impact on them. For others, though, there is a great deal of impact to their finances when it comes to the adjustments the tax law offers. Deferring income into the next year and pulling deductions into the current year, though, is the best way to continue to handle tax issues for most people. In 2018 there will probably be more limitations on deductions for expenses, and the income tax rates are expected to be lower.
By taking all possible deductions in 2017 and deferring as much income as possible until 2018, Americans can keep their taxes as low as possible and see the highest level of benefit from the new rules. Maximizing 401(k) plans, deferring bonuses until the next year, and reducing capital gains from investments can help people take full, legal advantage of the changes that will be seen in the tax laws. For those who are self-employed, investing in their business for the deductions can also be a good idea, because it can offer a way to lower taxes this year and help those taxes stay lower moving into 2018 and beyond.
By 2025, the majority of the tax benefits that are being offered with these changes are going to go away. Of course, the tax laws may be changed again by then, but it is important to work with the information that is currently available. You cannot control the laws, but you can control how much they positively or negatively impact you.
This content created by David Gaylor in conjunction with Fusion Capital Management.
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by radical promoting and their editorial staff based on the original articles written by jeff cutter in the falmouth enterprise. This article has been rewritten for David Gaylorand the readers of David's Family Finance. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.