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Last Minute Tax Tips & Tactics – Part I

Camarda Wealth Advisory Group

Ah, it’s March again, and the tax madness musters anew. For those who yearn to file by April 17th, the pressure begins to build. Before the mad dash takes off in earnest in just a few short weeks, you may want to brush up on the big disruptions to the tax code wrought by last year’s “tax reform.”

You’ll be dealing with some of the biggest changes in a generation, so be warned. Besides fundamental restructuring like the elimination of exemptions, there are more changes this year than have been seen in quite some time.  All the new rules will add mightily to the confusion, so best get a jump on it if you’ve not already begun. Worse, many old and cherished tax tactics have gone by the wayside, and if you’re not careful the new tax “cuts” may wind up biting your wealth instead of reducing your taxes. Tax strategy, always important to wealth-maximizers, should be especially scrutinized this year.

Before jumping in, it is useful to remember that US tax policy and law is in constant flux, a seething, changing thing driven by the complex and fickle political wind. The battlefield is ever-shifting, and readers are advised to keep a sharp and frequent lookout to chart the safest path through the fire and carnage. Like so many changes before it, the new tax reform is short lived, with many provisions “sunsetting” – expiring – after 2025, if they last that long. The future Congresses and President may extend them, or cancel them. Taxes may go up or down or stay the same. Tax policy breeds many unintended consequences, and change creates new winners and losers.

For now, we will mostly address income taxes since the urgency of these is probably why you are reading this article, but please be attentive to our upcoming thoughts on the much more insidious estate tax, which will be covered in another piece.

Here are some highlights of the big changes:

  1. Estate Tax. The estate tax exemption has been doubled to $11,180,000 per individual – almost $22.4M per married couple – which should make for far fewer taxable estates. Just remember that this may change at the whim of the next government, and that in any event the exemptions revert to the old level in 2026.
  2. Employee Business Expenses and Other Miscellaneous Deductions: W2 employees – as opposed to independent contractors or business owners – have always had the short end of the stick when it comes to business write-offs, where the small range of allowable deductions got whittled down to almost nothing by the arithmetic on the Schedule A. Well, the short stick’s now been whittled down to nothing, and employees no longer have any write off opportunities. Ditto for moving expenses, brokerage, IRA and investment advisory fees, new alimony, and most casualty losses. If these items apply to you, you could see significant tax increases. Where possible, using or setting up an owned business to expense applicable items could offer substantial relief.
  3. Exemptions and Itemized Deductions: The standard deduction has been effectively doubled, changing the calculus of whether to itemize things like charitable contributions, home interest, and so on. Complicating the calculus: there are no more personal exemptions. This is a sea change! Exemptions were basically a “bonus” deduction based on the size of the taxpayer’s eligible family, and available regardless of whether you itemized other deductions or just took the standard deduction. Depending on your situation, this can dramatically blunt the value of the expanded standard deduction. The limits for charitable deductions are slightly expanded. The so-called SALT for State and Local Taxes deduction is curtailed, with the sum of income, real estate, and sales taxes capped at $10,000. Business owners can continue to deduct these items if they qualify as business use. Finally, the nasty stealth tax on deductions – where an arithmetic shell game of “now you see ‘em, now you don’t” eliminated deductions or whittled them way down for higher-income folks, effectively boosting their tax rate – is gone under the new tax.
  4. Capital Gains Tax Rates stay the same at 0%, 15%, and 20%, plus (not to pick any NIITs), if applicable, the 3.8% Obama-era Net Investment Income Tax kicker. Remember that Capital Gains rates are determined by ordinary income rates – in other words, having sufficient business, interest, employment, or other “regular” income will drive the effective capital gains rate higher. According to financial commentator Michael Kitces, “because capital gains income stacks on top of ordinary income, even just increasing ordinary income can effectively crowd out room for preferential long-term capital gains rates. In fact, the interrelationship between ordinary income and long-term capital gains creates a form of “capital gains bump zone” – where the marginal tax rate on ordinary income can end out being substantially higher than the household’s tax bracket alone, because additional income is both subject to ordinary tax brackets and drives up the taxation of long-term capital gains (or qualified dividends) in the process.*”

That’s it for now. In Part II we will dwell a bit more on estate and gift taxes, look at changes in the so-called kiddie tax, review an important change on IRA ROTH conversions, and look at the many huge changes affecting business owners. Until then, as Franklin didn’t say, but should have: “taxes saved is wealth earned!”

* https://www.kitces.com/blog/long-term-capital-gains-bump-zone-higher-marginal-tax-rate-phase-in-0-rate/

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Camarda Wealth Advisory Group -“CWAG”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from CWAG.  Please remember that if you are a CWAG client, it remains your responsibility to advise CWAG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. CWAG is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of CWAG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: CWAG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to CWAG’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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