Looking Ahead to Next Year's Tax Time

Apr 9, 2018
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Morningstar personal-finance writer Christine Benz has a helpful piece today that ties in nicely with our current SMI newsletter article on what you can learn from your tax return.

While we focused on using tax data to figure out your giving level as a percentage of income (and also to calculate your overall tax burden as a percentage), Benz suggests looking at nearly 20 more areas — especially with an eye toward how the recently enacted Tax Cuts and Jobs Act will affect those areas when it’s time to file your 2018 return.

Here are a just few of the items she discusses:

Line 8 of Your 1040: Interest Income
...If you have a high level of taxable interest income, make sure that you’re paying attention to asset location and have assessed whether taxable bonds and money markets, rather than municipals, are truly the better bet for your taxable savings, once the tax effects are factored in. Now that yields cash and bond yields are finally trending upward, the negative tax effects of improper asset location will be more meaningful....

Line 40 of Your 1040: Itemized Deductions or Your Standard Deduction
.... Not only is the standard deduction going higher, but there are also new restrictions affecting the deductibility of certain items.... But don’t write off itemizing altogether. Some taxpayers may find that it’s worthwhile to itemize in certain years and claim the standard deduction in most others.... So save your receipts....

Line 52 of Your 1040: Child Tax Credit
Prior to 2018, this credit was worth $1,000 per qualifying child and was refundable to taxpayers with at least $3,000 in earned income. Starting this year, the credit is $2,000 per qualifying child under 17 and is refundable up to $1,400 for taxpayers with earned income of more than $2,500.

One thing she fails to mention about the child tax credit is that the income levels at which the credit begins to phase out have gone up significantly this year — from $75,000 to $200,000 for singles and from $110,000 to $400,000 for couples. That could make a huge difference for some taxpayers.

Moving to the Schedule A (itemized deductions), Benz notes that because "many fewer taxpayers will benefit from itemization" under the new laws and because tougher new rules limit the deductibility of home-related debt, "the case for mortgage-debt paydown" is now stronger. In other words, an increasing number taxpayers with mortgage debt will get little or no tax benefit from paying interest, therefore paying off a mortgage early has become more attractive.

And finally, she looks at the "Gifts to Charity" section of Schedule A (lines 16-19), noting that a taxpayer who "think[s] strategically" may be able to group donations in a particular tax year and thereby take advantage of the ability to itemize. Further, by using a donor-advised fund "a taxpayer [can] obtain a deduction for the year in which the funds are contributed to the donor-advised fund but then [distribute] the money deliberately over a period of years."

Romans 13:7 is unequivocal: "If you owe taxes, pay taxes." Fortunately, the tax code offers ways to reduce what you would otherwise owe, while at the same time deploying your money in more productive ways. Taking advantage of such money-saving tax provisions is wise stewardship.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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