Morningstar Magazine - February/March 2018 - 43

It will take time to determine how best to structure
businesses that rely on owners' "sweat equity."
3 Entertainment expense deductions eliminated.
This will be a huge blow to sports leagues
whose season ticket holders are primarily
businesses, as well as to other entertainment/
cultural organizations.
3 Research costs (including software development) can no longer be expensed; they
must be amortized over five years. This does not
apply to oil and gas companies. This deals
a big blow to business innovation-especially
small businesses.
3 The orphan drug credit reduced. This lowers
the incentive to develop cures or treatments for
rare diseases.
What Should You Do?

We are all subject to a new world of tax laws,
thanks to the new law. We can't change
the past, so what strategies and moves should we
consider? Here are my recommendations:
Watch Your Withholding
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.
Determine Whether You Will Itemize or Claim
the Standard Deduction
Many traditional itemized deductions are
no longer allowed, and the standard deduction
has been doubled. 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:
3 Medical expenses more than 7.5% of adjusted
gross income.
3 Home mortgage interest on principal of
up to $1 million for prelaw homes or $750,000 for
newly acquired loans.
3 Charitable contributions.

3 Maximum $10,000 of state, local, and property
taxes combined.

For example, let's compare a married couple's
allowable itemized deductions for 2017 versus 2018.
Say the couple in 2017 could deduct:
$12,000 in property taxes, $9,000 in state taxes,
$8,000 mortgage interest, $4,000 home
equity interest, $3,000 charitable contributions,
$1,000 tax prep, and $10,000 for investment
management minus 2% of adjusted gross income.
The deductions for the same couple in 2018
would be: $10,000 total property and
state taxes, $8,000 mortgage interest, and $3,000
charitable contributions.
Assuming they had an adjusted gross income
of $150,000, this couple's 2017 itemized
deductions would have totaled $44,000. The same
expenses would result in allowable itemized
deductions of only $21,000 in 2018. Without
deducting home equity interest, miscellaneous
itemized deductions and state/local/property taxes
above $10,000, this couple will now be forced
to claim the standard deduction of $24,000.
It is important to know if clients will be itemizing
or claiming the standard deduction because this
can have an impact on planning.
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 AGI.
How can they get a benefit? Try bunching
deductions every other year. In the above example,
let's say that the couple makes their Jan. 1
mortgage payment in December and prepays their
2019 charitable commitment by the end of
2018. Additionally, let's assume that the couple
pays an orthodontist bill by the end of 2018,
leaving $2,000 of medical expenses more than
7.5% of AGI. Based on this, the couple's 2018 total

itemized deductions will be $26,600-greater than
the $24,000 standard deduction.
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.
Pay Attention to Other Tax-Saving Strategies
Be sure to remember other tax-saving strategies,
as applicable. These can include:
3 IRA, SEP, or other retirement-plan contributions,
and Roth conversion.
3 Self-employed health insurance and health
savings accounts.
3 529 plans.
3 Tax-advantaged portfolio management,
such as tax-loss harvesting, tax-lot accounting,
and location optimization.
3 Retirement withdrawal strategies.

Although much has changed under the tax law,
many of the "tried and true" planning strategies
can still prove beneficial.
The new tax rules will have a major impact
on taxpayers as well as the U.S. economy.
How they will affect you and your clients depends
on your specific circumstances. K
Sheryl Rowling, CPA/RFS, is principal of Rowling &
Associates and head of rebalancing solutions
with Morningstar.

global.morningstar.com/Morningstarmagazine

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Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
Morningstar Magazine - February/March 2018 - 2
Morningstar Magazine - February/March 2018 - Contents
Morningstar Magazine - February/March 2018 - 4
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