The new tax law has upended tax planning for investors. With 2018’s higher standard deduction, fewer tax brackets and new tax treatments for some, now is the time to prepare to cut next year’s investing tax bill.
Here’s the Cliffs Notes version of the new tax law. There are fewer tax brackets – reduced from seven to three. The standard deduction has grown while all personal exemptions have been eliminated. The new standard deductions are $12,000 for singles, $24,000 for married filing jointly, $12,000 for married filing separately and $18,000 for head of household.
In the past, a single filer was entitled to a $6,500 standard deduction and a $4,150 personal exemption for a total of $10,650 in income exclusions. Now, the single filer gets a $12,000 standard deduction.
In exchange for the larger standard deduction, several itemized deductions have been eliminated, including tax preparation and investment management fees (more on that below). At the same time, the new tax law showers some investments with more generous tax breaks than before while setting up a potential ticking time bomb at the end of 2025, when many of the law’s tax cuts expire. As a result, investors need to think strategically about minimizing taxes both in the near-term and several years from now.