How to navigate new tax law surprises
This is the first year that many are subject to the new tax law, the Tax Cuts and Jobs Act of 2017, and taxpayers have to now learn how it will impact their planning and finances. The new law contains little surprises that may present challenges for even the most prepared.
Despite lowering the tax rate on top bracket earners, you may find that you need to pay more taxes because of the loss of some itemized deductions. But not every development presents a challenge; the law does provide some enticing new opportunities. Here are some tips to avoid some of the pitfalls:
Many taxpayers may want to try to benefit from one of the few deductions left intact: charitable deductions. To help make sure it makes sense for you to itemize for 2018 (rather than take the new, higher standard deduction), consider “bunching.” That is, give this year all that you had intended to give to charity over the next several years, and take the deduction now. Looking toward the future, donor-advised funds (DAFs) are often the ideal recipient for donors making charitable gifts. For example, gifts to DAFs may enjoy better tax treatment and flexibility than those made to private foundations, depending on the donor’s tax situation and the amount and nature of assets donated.
The new law offers tax incentives to those who invest in Qualified Opportunity Zones, which are designated areas in need of economic revitalization that require capital. If you’ve enjoyed large capital gains for any of a broad range of reasons, a new provision in the tax law offers deferral and possible partial forgiveness of capital gain taxes if the gain is invested in a Qualified Opportunity Zone Fund (generally) within 180 days of the sale of the assets.
State to state updates
As the new law caps property and state income tax deductions, some taxpayers in high-tax states might consider switching domiciles to low-tax states. Many Arizonans have relocated from other states with higher state income taxes – for example, California state income tax is 13.3%, whereas Arizona state income tax top rate is 4.54%.
Relocating may present risk twofold:
• A number of steps need to be taken to show that you no longer live in your previous home state. State taxing authorities typically evaluate many more factors to determine the state in which you live and to which you owe taxes. Visit your estate planning lawyers and have them check your key documents and the titling of your assets.
• Estate plans of newer Arizona residents may invoke the prior state’s income tax when a trust becomes irrevocable in the future. Out-of-state estate plans should be reviewed and if necessary, revised to optimize the Arizona state income tax on irrevocable trusts.
Paying with a credit line
Many high-net worth taxpayers pay their taxes with a line of credit. Having access to a line of credit allows you to smooth your cash flows and separate your investment decisions from your liquidity needs. Such a credit line, while used most heavily for springtime taxes, is useful all year long. Most people think about paying taxes once a year, but many high-income earners are paying estimated quarterly taxes.
New facets of the tax law present a change, and understanding the differences is more essential than ever. This year, working with tax specialists and financial advisors will help ensure that your tax strategy supports your near- and long-term goals.
Noreen Bishop Hill serves as Market Manager of J.P. Morgan Private Bank in the Desert Southwest Market. She manages a team of professional advisors with expertise in banking, investment management, credit, fiduciary management and wealth advisory. Chris Siegle is the Wealth Advisor in the firm’s Scottsdale Private Bank office covering Desert Southwest. He provides clients with advanced estate and tax ideas in collaboration with the client’s professional advisors. This article is for information purposes only, JPMorgan Chase & Co. and its subsidiaries do not render tax advice. For tax advice specific to your situation, please consult your tax advisor.