Tax reform could alter some financial tips, strategies – AZCentral.com

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The most sweeping tax overhaul in three decades will make big changes to how families pay their taxes. The bill lowers tax rates for all income groups, but caps or eliminates many popular deductions. (Dec. 21) AP

The tax-reform legislation that kicked in for 2018 won’t fundamentally alter most financial goals or strategies for mainstream Americans, but there are enough changes for investors to beware.

Plenty of people won’t be able to take certain deductions as in the past — and might not choose to itemize deductions at all — and that could alter the outlook on some investments and personal-finance issues.

Homeownership still makes sense

Homeownership is still attractive for many reasons besides taxes, and even the tax benefits remain solid. But new restrictions on property-tax and mortgage-interest deductions might put some homes out of the reach of potential buyers.

Mortgage interest remains mostly deductible (on new debts up to $750,000, down from $1 million on prior debts), and property taxes are still deductible, too. Yet some potential buyers will need to heed new restrictions that cap property-tax deductions, when combined with state/local income taxes or sales taxes, at $10,000 a year.

One key benefit didn’t change: If you live in and own a home as your primary residence for at least two years (within the past five), you may avoid capital-gain taxes on most or all profits (up to $250,000 singles or $500,000 married couples). 

One proposal would have lengthened the period to five years within the past eight, but it was dropped. Still, on how many other investments can you skirt some or all capital-gain taxes?

Retirement plans still make sense

Investing in Individual Retirement Accounts, 401(k)-style plans and similar accounts remains on track. Aside from a few details, retirement plans weren’t addressed in the tax legislation.

To the extent you hold stocks or stock funds in these accounts, tax reform could make them more appealing, as lower corporate tax rates will make many companies more profitable and possibly give a lift to the economy.

One proposal floated during tax-reform discussions would have limited the amount of money that workers could put into 401(k) accounts on a pre-tax basis, requiring additional contributions to go in as after-tax “Roth” investments, but that idea was nixed.

Still, the tax-reform process provided a reminder that policies and tax rates change over time. One way investors can buffer themselves against such changes is by holding a mix of both traditional and Roth retirement accounts, noted investment firm T. Rowe Price in a commentary.

The company urged investors to consider putting more money into Roth accounts, from which withdrawals may be taken tax-free.

Estate planning remains the same for most

It still makes sense to have a will, to update beneficiary designations on retirement/insurance investments and to have health-care and financial powers of attorney, which allow trusted friends or relatives to make decisions on your behalf should you become incapacitated.

To avoid probate, you also might want to utilize a trust or various direct-transfer documents (such as beneficiary deeds on Arizona homes). Tax reform didn’t alter those considerations.

While there was talk of eliminating the estate tax, it didn’t happen. However, the final reform legislation did double the exemption amount per person to roughly $11 million from around $5.5 million, affecting a small number of multimillionaires. Most people weren’t going to face an estate tax anyway. Even fewer will now.

As previously was the case, “Beneficiaries will still get a step-up in basis, meaning there would be no capital-gains tax due on inherited assets at the time of the transfer,” noted Fidelity Investments. An investment’s cost “basis” is that portion of its value on which taxes don’t apply, so stepping up or increasing the basis reduces any tax bite.

Reducing personal debt remains a wise strategy

The tax-reform measure doesn’t alter the wisdom of getting your financial house in order.

Interest on credit-card debts, for example, wasn’t deductible before, and that remains the case. If anything, debt makes less sense from a tax standpoint because interest no longer can be deducted on home-equity loans.

Getting rid of credit-card and other debt remains a popular New Year’s resolution this year, as in the past. 

But as more people go back to work and consumer confidence rises, borrowing also has been on the increase. The amount of available credit, the number of credit-card accounts and average debts all have increased in recent years, said the Consumer Financial Protection Bureau in a recent report.

Among financial resolutions for the coming year, saving more money and paying off credit-card debt were the two goals that garnered the most responses in a consumer survey by credit bureau Experian.

If some of your debt is medical-related, here’s a bit of good news: Compared with the prior rule that medical expenses could be deducted only to the extent they exceeded 10 percent of adjusted gross income, the new law lowers that threshold to 7.5 percent in 2017 and 2018, allowing more health-care costs to be written off.

Basic insurance considerations remain intact 

People still need homeowners, automobile and other types of insurance that provide protection against casualty losses. The tax legislation doesn’t fundamentally alter that.

If anything, property-casualty insurance arguably becomes more important as the new legislation eliminates the previous ability to deduct some unreimbursed losses from a flood, fire, burglary or other mishap.

Going forward, “Personal-casualty losses would no longer be deductible, other than those attributed to a disaster as declared by the president,” noted Tim Steffen, a director of financial planning at private-wealth firm Baird.

The start of a new year is a good time to review insurance coverage including premiums, deductibles and possible discounts.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

READ MORE:

New Year’s money resolutions to improve your finances in 2018

What will the U.S. economy look like in 2018? See what forecasters predict

Stock market outlook for 2018: Corporate tax cut, economic momentum are good omens

 

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