Tax Planning for Individuals Under the Tax Cuts & Jobs Acts

If you’ve never considered tax planning before, this might be the year to reconsider. At a minimum the IRS recommends that every W-2 wage earner should do a “paycheck checkup” and review their withholding. In response to the Tax Cuts & Jobs Act (TCJA), withholding tables changed earlier this year to give employees more money in their paychecks. The difference was not dramatic, but that extra money may leave many Americans under-withheld next April. Calculating the right withholding amount is more difficult this year as some provisions of TCJA have not been clarified. The IRS provides suggestions and an online calculator. To adjust your withholding, fill out a new W-4, submit it to your employer and withholding changes will show up in the next payroll calculation.

Self Employment Tax

Taxpayers who are self employed or rely on investment income or retirement plan withdrawals should also review their estimated tax withholdings to determine if their quarterly payments are sufficient under the new tax rules. Third and fourth quarter estimated tax payments are due by September 17, 2018 and January 15th, 2019. Taxpayers can avoid underpayment penalties if they 1) owe less than $1,000, 2) pay at least 90% of their estimated current year tax liability, or 3) pay 100% of the prior year tax liability (110% if your AGI exceeds $150,000).

529 Plans

529 Plans have become even more attractive under TCJA, as they can now be used for private K-12 education expenses. Contributions qualify for the $15,000 annual gift tax exclusion, can be made by anyone, and can be bunched in the first year, funding the plan with $75,000 and treating the contribution as made equally over a 5 year period. 529 Plans can also be rolled over into an ABLE account for special needs children. Rollovers will be income tax and penalty free through 2025.

Charitable Deductions

The limit on contributions increased under TCJA from 50% to 60 % of AGI. But the higher standard deduction means that fewer individuals will itemize under TCJA, eliminating the benefit of charitable giving on your Federal return. Charitable contributions will continue to be deductible on the Colorado return. Larger donors might want to consider “charitable stacking” in which they make significant contributions every other year or every third year. By lumping multiple year contributions into one year, taxpayers can take advantage of itemizing in certain years and the standard deductions in others. Donor advised funds can also be used to create a tax benefit now and offer flexibility to gift the money to qualifying organizations over the next few years. Taxpayers over 70-1/2 can use a qualified charitable distribution to directly transfer money from an IRA to charities. The money can satisfy required minimum distribution requirements and reduces taxes because the money is not claimed as income on your tax return.

Medical Expense Deduction

The medical expense deduction has temporary and retroactively changed for 2017 and 2018 to allow deductions for medical expenses over 7.5% of AGI. This will change back to a 10% limit in 2019. Scheduling elective surgery this year could enable you to itemize next year.

Alimony and Divorce

Prior to TCJA, alimony and maintenance payments were deductible to the payor and considered taxable income to the recipient. Divorce or separation agreements finalized after December 31, 2018 payments will be neither deductible or taxable. The prior laws were beneficial to both parties as the payor was typically in a higher income bracket and could be more generous due to the tax deduction. If a divorce is pending, it may be beneficial to finalize proceedings before December 31, 2018.

This information is provided for general information only and should not be construed as specific tax advice as your situation may vary.

Contact a CPA Today for Tax Planning!

Karen Schwimmer, CPA works with individuals year-round to help plan for tax season, and incorporates business taxes for a complete financial picture. Contact Karen Schwimmer, CPA today at 303-642-0628 or

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