The new tax regime is expected to lower taxes for the vast majority of Americans, as well as small-business owners — at least until the cuts expire after eight years.
Here’s a brief summary of how your tax deductions will change in 2018, and one major switch you need to be aware of if you have managed IRAs or other retirement accounts.
How your tax deductions will change in 2018
Good news and bad news. The standard deduction has been increased to $12,000 for individuals and $24,000 for couples, so 90% of all taxpayers are expected to use the standard deduction and not itemize.
You will still have the ability to deduct charitable deductions if you itemize, but only 10% or so of taxpayers will now itemize.
You may also still deduct medical expenses. In fact, the provisions are now slightly more generous. You can deduct expenses exceeding 7.5% of income (instead of 10%, under previous rules).
You may deduct state and local income taxes, and property taxes, but only up to $10,000 total per year.
The bad news is that you have lost the ability to deduct miscellaneous deductions like tax prep fees, investment fees (like those you pay to our firm), unreimbursed employee expenses and other deductions.
There are also changes to mortgage deductions and home equity loans but we’ll talk about those in a separate article, as they’re a little more nuanced.
Have IRAs or retirement accounts? Read this …
Here’s what’s important if you have IRAs or other professionally managed retirement accounts.
In the past, some clients paid their investment management fees out of non-retirement accounts so they could deduct them (expenses paid out of IRA or retirement accounts have never been deductible).
However, there’s now a new wrinkle to this strategy.
Tax preparation, legal, financial planning and investment management fees are no longer deductible in 2018, due to the hike in the standard deduction and the elimination of miscellaneous itemized deductions.
Therefore, the best strategy for many people may be to pay their investment management fees directly from their IRA or other retirement accounts. This allows fees to be paid with PRE-tax dollars, which is still very favorable from a tax perspective. (E.g. Instead of withdrawing funds from your IRA, paying income tax, then paying expenses, you can pay expenses directly from the IRA and avoid the income tax bill. Expenses paid from your IRA do not count as taxable withdrawals).
The Takeaway: Want to pay fees directly from your IRA or other retirement accounts? Please drop us a line so we can make the necessary arrangements!