Maybe you’ve already filed your 2018 Form 1040. Or you soon will. Either way, let’s do a postmortem and find some ways to do a better tax-saving job this year (2019). One way to beat the system is to get more mileage from your standard deduction and from itemized deductions that are still allowed under the Tax Cuts and Jobs Act (TCJA). Here are four strategies.
1. Game the increased standard deduction
The TCJA almost doubled the standard deduction amounts. The 2019 standard deductions are:
* $12,200 if you are single or use married filing separate status.
* $24,400 if you are married and you and your spouse file a joint return.
* $18,350 if you are a head of household.
If your total itemizable deductions for this year will be close to the applicable standard deduction amount, consider making enough additional expenditures for itemized deduction items before yearend to exceed your standard deduction. Those prepayments will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
* The easiest deductible expense to prepay is included in the house payment due on January 1, 2020. Accelerating that payment into this year will give you 13 months’ worth of interest in 2019. Although the TCJA placed new limits on itemized deductions for home mortgage interest, you’re probably unaffected. https://www.marketwatch.com/story/how-home-owners-win-and-lose-under-the-new-tax-law-2018-06-11
* Next up on the prepayment menu are state and local income and property taxes that are due early next year. Prepaying those bills before yearend can decrease your 2019 federal income tax bill, because your itemized deductions total will be that much higher. However, the TCJA decreased the maximum amount you can deduct for state and local taxes to $10,000 or $5,000 if you use married filing separate status. So beware of this limitation when considering the prepayment idea.
Warning: The state and local tax prepayment drill can be a bad idea if you will owe the dreaded alternative minimum tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules. Therefore, prepaying those expenses may do little or no tax-saving good if you are in the AMT mode. Thanks to the TCJA, however, there’s less chance that you will be in the AMT mode for 2019. See https://www.marketwatch.com/story/meet-the-new-friendlier-alternative-minimum-tax-2018-02-26.
* Consider making bigger charitable donations this year and smaller ones next year to compensate. That could cause your itemized deductions to exceed your standard deduction this year. Next year, you can claim the standard deduction.
* Finally, consider accelerating elective medical procedures, dental work, and expenditures for vision care. For 2019, you can deduct medical expenses to the extent they exceed 10% of your adjusted gross income (AGI), assuming you itemize.
2. Pay down your mortgage
You might be unable to deduct your home mortgage interest expense due to the generous standard deduction amounts for 2019. If so, that mortgage interest is not doing you any tax-saving good. So why not get rid of some mortgage debt by paying more than the required monthly amount? Good idea. Doing that would effectively earn you a tax-free and risk-free rate of return equal to your mortgage interest rate (4%, 4.5%, whatever). Nice.
You might also be unable to deduct all of your home mortgage interest due to the TCJA’s new limitations. https://www.marketwatch.com/story/how-home-owners-win-and-lose-under-the-new-tax-law-2018-06-11. If so, the mortgage interest prepayment strategy makes sense for you too. Once again, that would effectively earn you a tax-free and risk-free rate of return equal to your mortgage interest rate.
3. Move to a low-tax state
This could be viewed as a drastic measure, but lots of folks are doing it. https://www.atr.org/report-shows-americans-flee-high-tax-states-embrace-low-tax-states. The TCJA’s new limitation on itemized deductions for state and local taxes may accelerate the trend. Bottom line: paying lower and state and local taxes will save you money, whether you can deduct those taxes on your Form 10404 or not. Another thing: it’s also quite likely that a nice home in a low-tax state will cost less than one in a high-tax state.
4. Make charitable donations out of your IRA(s)
If you’ll be age 70½ or older by yearend, you can replace taxable required minimum distributions from your IRA(s) with tax-free donations to IRS-approved charities from your IRA(s). This amounts to a 100% deduction for the donations, because you avoid being taxed on an equal amount of required minimum distributions. This strategy works especially well if you are among the many who would not get any tax-saving benefit from regular charitable donations, because your total itemized deductions for the year (including donations) would be less than your standard deduction. My next column will have more on this strategy. So please stay tuned.
The bottom line
There you have it: four ideas on how to beat the tax system this year, even if you did a lousy job of it last year. Beating the system is always fun, especially when it saves you money.