The new tax law is in effect and there are changes to be considered. Spoiler alert, tax discussions can be sleep - inducing. You are forewarned! The standard deduction – the amount that all tax filers can deduct from their income each year – was doubled to $12,000 for single filers and $24,000 for joint filers. Taxpayers age 65 and older get a higher deduction – single filers add $1,600 and joint filers can add $1,300 per spouse. People itemizing deductions are expected to fall by around 60% this year.
Qualified Charitable Donation (QCD) – Even if you take the standard deduction, the tax law still allows you to get some tax breaks for donations in the form of a Qualified Charitable Donation or QCD.
Individual Retirement Accounts (IRA) grow tax-free until retirement when distributions are included as taxable income that year. Regardless of whether funds from these accounts are needed or not, at age 70 ½ the IRS requires annual minimum distributions.
Regulations, however, allow those 70½ years or older to donate up to $100,000 tax-free from their IRA each year to a charity. The charity will not pay income tax on the donation and although there isn’t an income tax deduction for the donation, the amount is removed from adjusted gross income. This may mean a lower income tax bracket, potentially avoiding certain penalties that come with a higher adjusted gross income, such as higher Medicare premiums and the 3.8% tax on net investment income for taxable assets.
QCD’s may be appealing for those who do not need their full Required Minimum Distribution (RMD) for annual spending needs and who are interested in contributing to a charity. An important piece of advice, however, is if you are interested in having your RMD become a QCD, start the process now – it can be lengthy and the donation must be received by the charity no later than December 31st.
Capital Gains & Losses – The new tax law also changes how capital gains are taxed. Short-term gains – profit from sale of investments owned less than one year – will still be taxed as ordinary income. But for long-term gains – profit from investments owned more than a year – taxes are determined according to income thresholds. The difference will most likely not be earth - shattering, but still something to take note of.
The chart below shows the various income thresholds and the corresponding capital gains rate. A newly retired couple with taxable income of $60,000 could sell stocks at a gain up to $17,200 without paying tax on the appreciation of the stock. Any gain above the 0% threshold amount is taxed at the higher rate. For instance, if the same couple instead took $30,000 in capital gains then $17,200 of gains are tax-free and the remaining $12,800 is taxed at 15% or $1,935.
Unfortunately not all stocks go up in value. Selling at a loss offsets capital gains on stocks that performed well. If losses are greater than gains in a tax year, one can use up to $3,000 to reduce taxable income and carry forward remaining losses for future tax years. This is “Tax Loss Harvesting” but beware of some stipulations, most notably, making sure to wait at least 30 days after selling the stock to buy it again.
So now you can wake up from your nap, the lecture is over. But go see your tax preparer… there are indeed benefits to be found in the new tax law.