Financial Fitness

Tax Reform: This Year’s Key Takeaways for Investors

What we learned from the 2019 tax season can help investors get in better shape for tax day in 2020.

by Michael W. Brough - June 03, 2019

After the sweeping changes of the Tax Cuts and Jobs Act took effect in 2018, investors may have been caught off guard when they saw the real impact on their tax returns. With those results in hand, it’s a great time to consider any adjustments in preparation for tax day 2020.

Here, Kris Gretzschel, CFP®, Wells Fargo Advisors Planning and Life Events Manager, offers four crucial points that investors should consider.

1. Adjust withholdings to match your tax liability

Though some people may have been disappointed about the size of their refund for the 2018 tax year, their actual total tax burden still might have decreased.

“The IRS changed the withholding tables for the new rules.  This required employers to withhold less tax from each paycheck leaving smaller refunds – or no refund – for many employees,” Gretzschel says. In other words, if you paid fewer taxes from your paycheck throughout the year, it means you’ve seen the benefit all year long—and that likely means you won’t see a big refund from your returns.

In fact, if you did get a big refund, Gretzschel says you may be better off changing your withholding amount so the savings are spread throughout the year. That gives you a chance to invest the extra cash sooner instead of later.

If you have income taxes withheld from your income, use the IRS calculator to determine what you should pay.

2. Remember that many tax-law changes are temporary

While adjusting your withholding can be a smart move, Gretzschel recommends carefully considering decisions with long-lasting consequences if you’re basing them on what could be only short-term changes. “Some tax law changes are permanent, but most changes to personal income tax remain in effect only through 2025,” she says. As one example, she says business owners should be cautious about changing their business structure in response to the tax law and should have a plan in place if they need to undo any changes.

3. Reevaluate charitable giving

A higher standard deduction generally means charitable contributions won’t count as much as in years past. That means your method of giving can have an impact on your tax bill. “If you’re an annual giver to charity, think about the timing and method of making those gifts,” Gretzschel recommends.

If you have the means to double or triple your contribution in one year a bunching strategy may provide more deductions over a period of years than continuing with your regular annual giving.  Your tax advisor can help determine if this will benefit your situation.  To use this strategy, consider a donor-advised fund. “You get the tax benefit for the year of the gift,” says Gretzschel, “but you can direct the disbursement of those funds over the coming years, just as you would with your annual giving.”

A few things to remember about donor-advised funds: “It’s invested money, so its value can increase or decrease,” she explains. “Also, moving money into the fund is irrevocable.”

Gifts of securities can be a wise move in the current tax climate. Donating appreciated stock you held more than one year can get you a deduction based on its present value, and saves you from paying capital gains taxes.

See “Tax Reform’s Impact on Charitable Giving” for more.

4. Look at loans

“If you’ve taken out a home equity line of credit for something other than your home, business or investment use, it is likely that the interest is not deductible,” Gretzschel says.

In essence, the cost of these loans just went up, if the interest is no longer deductible under the current tax rules. For Gretzschel, this raises a couple of questions: “Should you look to pay it off more quickly if the interest isn’t deductible; is it possible to refinance at a lower rate or shorter term to reduce your interest costs?”

Michael W. Brough is a Texas-based writer whose work has appeared in the Wall Street Journal, the Washington Post, USA Today, and other outlets.

Additional Resources

In light of the Tax Cuts and Jobs Act it may be time to update your estate planning documents and consider rethinking your investment approach.

 

Wells Fargo Advisors is not a tax or legal advisor.