The new tax laws take effect this year. For many Connecticut residents, there is justified angst.
A recent article in the Business Insider named Fairfield County the fourth-worst place in the country to buy a home in light of the new tax laws. That is not the list many of us want to be on.
Limiting the property tax deduction to $10,000 and eliminating the mortgage deduction for new debt over $750,000 affects a lot more of us here in the Northeast than in other areas of the country.
Many talk of moving to Florida, where there is no state income tax, but that is often just talk. Instead, taxpayers in Connecticut need to make the most of the changes and start to plan for the new laws going forward: In other words, time to make lemonade out of lemons.
There are several planning strategies to help; here I name four:
Should your business be a S-Corp, C-corp or none of the above? The structure of your business will mean a lot going forward. There is a new deduction available for business owners, called the qualified business deduction. Comparing this deduction to the now-reduced rate a C-corp will pay is critical to understanding whether a change is warranted.
Do you have the right retirement plan? Making a retirement plan contribution can lower your taxable income. Not all retirement plans are created equal. Defined benefit plans allow for far greater contributions than, say, a 401(k). This is especially important for taxpayers whose income is just over the new rate of 24 percent — income under $315,000 is taxed at 24 percent vs. 32 percent for income over $315,000 — a substantial difference.
Those with second properties, say vacation homes, whose property taxes when combined with their primary home exceed the $10,000 aggregate limit will miss out on this popular deduction. However, investment real estate is not subject to those caps. Now is a good time to evaluate whether to start renting out that second home.
Charitable contributions are not deductible if you take the standard deduction. However, the so-called bunching strategy may work for some. For instance, in 2018-19 take the standard deduction. Then, in 2020, bunch several years of charitable contributions in one year instead of taking the standard deduction. Bunching deductions in one year is a viable way to save taxpayers money, but it depends on several factors — best to check with an expert.
All in all, Connecticut residents impacted most by the latest tax law changes need to start thinking out of the box. Proper planning today may relieve several tax headaches in the future.
Michael Aloi is a certified financial planner professional in Fairfield and be reached at email@example.com.