6 important strategies to get the most out of the new tax law

There are just a few weeks left to improve your tax situation for this year and get a jump on planning for the next. The tax cut and jobs act of 2018 (TCJA) reduced income tax rates, and although that’s good news, some popular tax breaks were reduced or eliminated. Those eliminations could offset your lower rate, so you need to understand the 6 important strategies to get the most out of the new tax law.

1. Check Your Withholding

You want your withholding to be in the Goldilocks zone – juuust right. If, when you file your taxes, you owe too much, there will be penalties for not paying your fair share during the year. If you’re getting that big tax refund each year, you’re giving the government a loan. That money is better off in your hands via a higher monthly paycheck throughout the year. If you’re afraid that you’ll spend it? Then we need to talk about budgeting, but that’s a different blog post.

Check out the IRS withholding calculator to determine the appropriate withholding for you.

If you find that you are having too much or too little withheld, file a new W-4 with your employer.

Itemization Optimization

According to the IRS, previous to the 2018 tax year, about 30% of all tax filers itemized their deductions. The Tax Cuts & Jobs Act (TCJA) will reduce that percentage by half because the standard deduction will double and the new law caps the deduction for state and local taxes at $10,000.

If you’re on the cusp of itemizing your deductions, here are a few strategies to put you over the hump.

2. 2018 Medical Expense Bonus!

Take advantage of it while you can! The unreimbursed medical expenses deduction for 2018 is the amount that exceeds 7.5% of your adjusted gross income. In 2019, it reverts to 10% of your AGI.

Gather Your Receipts

If you’re close to the 7.5% threshold, make those doctor appointments or schedule that Lasik surgery before December 31. The IRS allows you to deduct health insurance and Medicare premiums, doctor visit copays, preventative care, and operations. Don’t forget about dental and vision care, prescriptions, and hearing aids.

The IRS also lets you deduct the expenses that you pay to travel for medical care such as mileage, bus fare, and parking fees. Even if it’s only a mile or two, they had up!

3. Charitable Lumping

Due to the increased standard deduction, the number of people who will see a tax benefit from charitable donations will decrease. There still may be a way to get a tax benefit, however, by way of charitable lumping, also called charitable chunking, or bunching. No matter what you call it, it’s when you combine two years worth of donations in one year.

For example, let’s say due to the new $10,000 cap on deductible state and local taxes your only other deductions are $10,000 of mortgage interest and $3,000 of charitable contributions. You’re married, so your new standard deduction is $24,000, which is higher than your itemized total of $23,000. There is no tax benefit from your contributions.

What you might do is double up charitable contributions in 2018, making $6,000 of charitable contributions bringing your itemized amount to $26,000, above the standard of $24,000. In 2019 you don’t make any charitable contributions lowering the itemized amount to $20,000. So you end up making charitable contributions every other year. One year you’re receiving the benefit from the standard deduction, the next maximizing the use of your charitable deductions.

If you choose this charitable donation strategy, I recommend advising your favorite charities. Their annual budgets rely on donations, any change to that will affect their plans. There is one more way to receive a tax benefit for your contributions if you’re over 70 1/2.

4. Qualified Charitable Donation (QCD)

If you’re over 70 1/2, you can donate your required minimum distribution, or any amount for that matter, from your IRA or 401(k) to your favorite charity tax-free. That’s right, the entire amount taken out is 100% tax-free and not counted towards income. Here are the rules:

  • You must be at least 70 1/2 to use the QCD.
  • The payment must be a direct transfer from your retirement account to a public charity, not private foundations or donor-advised funds. It cannot go to you first, and then you write a check to the charity.
  • The maximum amount that can qualify for a QCD is $100,000 per year and applies to the sum of QCDs in a calendar year.
  • The QCD is a per-person rule, so your spouse can make a $100,000 QCD from their accounts as well.
  • There are no minimum amounts or limits to the number of charities that you can contribute. It could be $25 to one, two, or ten charities.

Who needs to itemize when you can donate to your favorite charity every year with the more powerful QCD? Learn more here about Qualified Charitable Donations.

Investment Tax Harvesting

If you have a brokerage investment account, you can take advantage of the tax laws to efficiently manage your portfolio through investment tax harvesting. Since the selling of investments in retirement accounts such as a 401(k), 403(b) or IRA does not result in a taxable event, harvesting does not apply to those accounts.

5. Tax-Gain Harvesting @ 0%

Not as well known as tax-loss harvesting, which we’ll discuss shortly, tax-gain harvesting at the 0% rate applies only to long-term capital gains. Let start with a review of long-term and short-term capital gains.

Short-Term Capital Gain: Tax on the gain (profit) from the sale of an investment held for one year or less. The tax on a short-term capital gain is equal to your ordinary income tax rate.
Long-Term Capital Gain: Tax on the gain (profit) from the sale of an investment held for longer than one year. The tax rate on a long-term capital gain is either 0%, 15% or 20%, depending on your income and filing status.

To take advantage of the 0% rate, your income must be:


Let’s say you sold $10,000 of stock in December 2018 that you bought for $5,000 in 2016. That’s a long-term capital gain of $5,000. If you and your spouse have taxable income of $75,000 (including your stock gain of $5,000), the tax you owe from that gain is zero, nada, zip. Not bad, you picked a stock winner and paid no tax on the profit.

The key to obtaining the 0% long-term capital gains rate is that your taxable income, INCLUDING THE LONG-TERM GAINS, must stay under the thresholds in the table above. The more investments you sell at a long-term gain, the more income that could push you into the next long-term capital gains rate of 15%. Be careful.

6. Tax-Loss Harvesting

You took a chance on a can’t-miss stock that missed. Thankfully you can sell that investment and use that loss to your tax benefit. Let’s use a simple example.

Let’s say you sold $10,000 of stock in December 2018 that you bought for $15,000 in 2016. That’s a long-term capital loss of $5,000. You can use $3,000 of that long-term capital loss in 2018 to offset ordinary income and carry $2,000 to 2019.

That’s the result if you only sold that one investment in 2018. If you have multiple sales of investments throughout the year, here is what you do.

  1. Match short-term losses against short-term gains,
  2. Match long-term losses against long-term gains
  3. The excess losses, if any, can be used to offset the opposite kind of gain.
  4. If you end up with a net capital loss, that is when you can take a deduction of the loss up to $3,000 per year, with the ability to carry additional losses to the following year.

Wash Sale Rule

Beware, when you sell an investment at a loss, you must wait 30 days before repurchasing it, or a substantially identical investment or the tax loss is disallowed. If that occurs, you have to add the loss to the cost basis of the new investment purchased.

Let’s use the same example from above with a twist. You sold 100 shares of Company A stock for $10,000 on December 27, 2018, that you had bought for $15,000 on November 30, 2017. That’s a long-term capital loss of $5,000. Then on January 6, 2019, you buy 100 shares of Company A for $9,000. Since it has not been more than 30 days since you sold the stock, the $5,000 loss is disallowed. The $5,000 loss gets added to the new purchase of $9,000, so your cost basis is now $14,000.

One thing I should mention, there is no wash-sale rule on taxable gains, the wash rule only applies to taxable losses. You should use harvesting in coordination with your overall portfolio strategy and rebalancing. The tax considerations are secondary. If the harvest goes against your investment strategy, it may not be worth it.

TCJA Tax Fun

No, there is no such thing as tax fun. The TCJA is a perfect example of the moving target that planning for taxes can be. The idea of tax planning is to take advantage of the current rules to create tax efficiency so that no matter what happens in the future, you’ll be in good shape tax-wise.

Do you have any questions or feedback you’d like to share? I’d love to hear your thoughts, so please feel free to leave a comment below so we can continue the discussion.