Thanks to the Tax Cut and Jobs Act (TCJA) there have already been many changes to the country’s tax law. Americans will really see many of those changes come tax season in early 2019. Whether you like the changes or not, there are some tax breaks that could end up being better in the long run. Here are three to consider.
Capital Gains Tax – the Trump administration has openly discussed the idea of indexing the basis of an investment to inflation, which would lower the amount of a capital gain that could be taxed. Whether or not this happens, it does make some sense.
Indexing an investment’s purchase price to inflation could lower the loss amount a person could claim as a deduction. Investments that lose money could then be carried forward to future tax returns when future gains absorb the losses. Additionally, as the market keeps ticking up, the idea of increasing that basis might help encourage investors to hold onto highly appreciated stocks longer.
Estate Tax – thanks to the estate tax threshold being raised to $11 million per person, wealthy individuals must decide whether to donate to heirs now or wait till they pass on. By giving it away now, the money can grow in the heir’s estate. And it would only be subject to capital gains.
The downside is gifts given through an estate are subject to a step-up basis. That means the assets are valued on the date the giver dies. However, if you were worth $25 million and you made a $10 million gift now, and you lived another 10 years, you could save as much as $4 million dollars at 5 percent growth rate.
Charitable Giving – because the standard deduction has been raised most people will no longer do itemized deductions. That could be an issue for many wealthy taxpayers. Numerous wealthy individuals are prone to donate, but unless they donate enough to surpass the $12,000 threshold they no longer get a tax break for their donation.
One option to overcome this would be to donate five years worth of donations into a donor-advised fund. If you donated $5,000 for each year you would easily surpass the $12,000 threshold. You would also be able to claim a deduction and give out the money over the five-year period.