Now that Republicans in the House and Senate have agreed upon principles for a joint tax reform proposal, individuals are analyzing how their finances will be impacted under the new legislation.
Continue Reading Below
One expert told FOX Business that everybody has the opportunity to benefit from the proposed reforms, it will just require some strategizing.
“No more taxes as usual: You can’t just do the same thing and let the government’s changes affect you,” Elijah Kovar, co-founder of Great Waters Financial, said. “The wealthy, no matter what changes happen, they find out how [they can] use it to their advantage. It’s time the middle class does the same thing.”
One of the main pieces of advice Kovar is giving his clients is that it’s no longer appropriate to develop tax plans on a year-to-year basis. Instead, strategies should take into account multiple years’ worth of financials.
The new bill aims to nearly double the standard deduction, to $12,000 for single filers and $24,000 for married couples filing jointly. That means, it may make sense for more people to take the standard deduction rather than itemize. However, Kovar recommends some taxpayers should consider doing both. One way to accomplish that is by bunching deductions.
“What if we can take the standard deduction in one year, but then in 2019 we pile a bunch of 2018’s expenses and pull in some of 2020’s expenses, and come up with $30,000 of itemized deductions?” Kovar explained.
By timing your payments strategically, paying your mortgage on January 1 instead of December 31 for example, you can maximize the amount of deductions in some years, while taking the standard deduction to offset the other years.
Some of the deductions that could work for a bunching strategy include medical payments, charitable contributions and mortgage payments.
If approved, the Republican tax bill would impose the biggest changes on the U.S. tax code in more than three decades, which is why Kovar said individuals should not expect the strategies they are using to take advantage of the current tax system to yield maximum benefits under the reformed one.
Among the major changes put forth in the bill include a $10,000 cap on state, local and property tax deductions, doubling the exemption threshold for the estate tax, repealing the Alternative Minimum Tax for corporations and increasing exemptions for individuals. The bill would also keep the seven-tier bracket system, though rates and thresholds would shift.
Lawmakers said they expected the bill to be put up for votes this week.