This is a hidden column


5 Ways Advisors Can Tackle the New Tax Law in 2018

What strategies advisors should consider this tax season

Sheryl Rowling


U.S. taxpayers are all subject to a new world of tax laws in 2018, thanks to the new tax law from the Republican Congress and administration. Many analysts have provided illustrations of how the so-called Tax Cuts and Jobs Act would increase a typical individual’s tax liability, while others are certain that the law will decrease the average taxpayer’s tax hit.

We can’t change the past, so what strategies and moves should advisors consider this tax season?

5 recommendations for advisors under the new tax law

  1. Watch your clients’ withholdings. New withholding tables will likely reflect lower tax rates under the new law. While taxpayers might feel good about getting a larger check each payday, the tables might not represent their tax picture. In other words, taxpayers should be wary of fast money in their pockets. They might end up owing more come April 2019.
  2. Determine whether your clients should itemize or claim the standard deduction. Many traditional itemized deductions are no longer allowed, and the standard deduction has been doubled in the new tax law. What this means is that many more taxpayers will be claiming the standard deduction—even if they itemized in the past. As of 2018, allowable itemized deductions will be the total of:
    • Medical expenses more than 7.5% of adjusted gross income
    • Home mortgage interest on principal of up to $1 million for prelaw homes or $750,000 for newly acquired loans
    • Charitable contributions maximum $10,000 of state, local, and property taxes combined
  3. Consider bunching deductions. Just because taxpayers claim the standard deduction in one year doesn’t mean they can’t qualify to itemize in another year. Remember that if they claim the standard deduction, they will get no tax benefit from paying state/ local/property taxes, mortgage interest, charitable deductions, or medical expenses more than 7.5% of adjusted gross income. So how can your clients get a benefit? Try bunching deductions every other year. For example, a taxpayer whose deductions are just under the standard deduction amount could consider prepaying property taxes one year and then not prepaying in the following year. By "bunching" property tax deductions, the taxpayer could benefit from itemizing every other year while not losing the value of the standard deduction in alternate years.
  4. Consider a donor-advised fund. A donor-advised fund can provide further opportunity to bunch charitable deductions without immediately distributing funds to specific charities. It’s like a charitable IRA. Investors get a tax deduction as soon as they contribute to the fund. The fund invests the money until they decide to make grants to the charities of their choice, and they don’t pay taxes on growth while the funds are invested. Also, investors don’t have to contribute cash—they may get greater tax benefits by contributing appreciated securities. They will get a deduction for the full value of the shares—and they won’t pay tax on the gain. Because they receive a charitable deduction at the time they contribute to their fund, if they establish and contribute to the fund before year-end, they will receive a tax deduction in 2018—no matter when they designate grants in the future.
  5. Pay attention to other tax-saving strategies. Be sure to remember other tax-saving strategies, as applicable. These can include:
    • IRA, Simplified Employee Pension plan, or other retirement-plan contributions, and Roth conversion
    • Self-employed health insurance and health savings accounts
    • 529 plans
    • Tax-advantaged portfolio management, such as tax-loss harvesting, tax-lot accounting, and location optimization
    • Retirement withdrawal strategies

The new tax rules will have a major impact on taxpayers as well as the U.S. economy. But how the new tax law will affect you and your clients depends on individual circumstances. Still, many reliable tax-planning strategies can still prove beneficial.

See how you can maximize tax savings for all clients through our web-based platform for modern advisors.

Request a Demo

The Morningstar Retirement Quiz for Advisors

Test your knowledge and get ideas for helping your clients.

Trending Research

Get our latest in-depth analysis and differentiated industry coverage.

Join us at the Morningstar Investment Conference

Register for MIC June 3-5