There’s planning for the year to come — and there’s the look ahead accompanied by the hindsight of lessons learned in the year just cleared. As the calendar moves toward year’s end, you and other Connecticut taxpayers have a syllabus of sorts for the primer that was the 2018 tax year — the first under the Tax Cuts & Jobs Act — and there are things you can do differently next year to mitigate the taxes you owe come April 2020.
If laying the groundwork for tax exposure is a pillar of financial planning, many in Connecticut absorbed a shaking in the past year in the wake of President Trump’s signature overhaul of the U.S. tax code. The Tax Cuts & Jobs Act slashed the U.S. corporate tax rate, restructured individual income tax brackets and eliminated some tax breaks while enhancing others — or in a few instances, creating entirely new shelters.
For those wanting to get a refresher in advance of consulting with their tax preparer, Investopedia is one of the websites with a catalog of changes under the new law, which can be found online by searching “TCJA” at investopedia.com.
As has been reported widely, some taxpayers got tripped up on the basics — for instance, H&R Block determined that only one in five earners adjusted the amounts withheld each week by their employers for tax purposes, leaving many with smaller refunds from the Internal Revenue Service or having to write checks come April. The IRS is now redesigning the W-4 forms used by employers to report pay to their workers, eliminating withholding allowances in recognition of the fact that people can no longer claim personal exemptions.
If you and your accountant learned it all on the fly — for some, including a few tough lessons on overlooked details like those withholding adjustments — there are still a few new elements not all have leveraged to their advantage, according to Ralph Anderson, an accountant with Beers, Hamerman, Cohen & Burger with offices in New Haven and Fairfield who is the federal income taxation expert on the advisory council of the Connecticut Society of CPAs.
Those include “bunching” itemized deductions over more than one year, and so periodically topping the new threshold for the standard deduction that doubled to $24,400 for couples under the Tax Cuts & Jobs Act. “Consider making two years’ worth of charitable contributions every other year — by doubling up on the donations, you may be able to exceed the standard deduction and yield a greater tax advantage,” Anderson advises. “The same holds true for real estate taxes — consider accelerating a real estate tax payment into the current year, but be mindful that the tax deduction is capped at $10,000 for real estate, vehicles, and state income taxes combined.”
That $10,000 cap was an unwelcome development for many in Connecticut — property taxes alone push many who itemize taxes above the threshold — with the state General Assembly and former Gov. Dannel P. Malloy responding by introducing a change in Connecticut’s tax code to partially offset the impact.
The state Department of Revenue Services now provides an incentive for business partners and owners to file their income taxes using business forms rather than the personal income tax forms they had used in the past, enabling them to claim a tax credit from the IRS in the process. Nearly 10,000 business owners were hit with penalties this year after missing deadlines for payments on estimated taxes owed, however, as they worked through the complexities of the maneuver. In response, DRS announced in August it would waive those fines, allowing any filers who had paid them to apply those amounts to future estimates on taxes owed.
Year to year, there are automatic adjustments to how much income earners can apply to varying investments that lessen one’s overall tax bill, including allowed contributions to employer-based 401(k) retirement savings plans and individual retirement accounts.
After the IRS bumped up the 401(k) contribution cap by $500 this year to $19,000, the benefits-consulting firm Mercer predicted an identical increase for next year, with the IRS releasing the actual figure entering November each year, along with “catch-up” allowances for those age 50 and older. Anderson also notes that the Connecticut Higher Education Trust offers a significant way to reduce tax liability through its 529 College Savings Program, with couples able to contribute up to $10,000 annually, covering school expenses from kindergarten through graduate school.
There are other, more obscure tax-mitigation opportunities for savvy investors that require a little more study, including the new Opportunity Zone program created under the Tax Cuts & Jobs Act that can reduce to zero the taxes on any capital gains from long-term investments in real estate or startups.
Intended to spur development in neighborhoods shunned by investors in the past, the Opportunity Zone program has been criticized by many for lumping in too many thriving districts that have seen ample development in the past decade — Connecticut examples include downtown Stamford which is under a continuing building boom — but the tax implications are real for sophisticated investors in real estate investment trusts (REITs) set up to capitalize on the new law, according to Bryan Meek, a certified public accountant with Cranbury Tax Associates in Norwalk.
The Washington, D.C.-based National Council of State Housing Agencies maintains an active list of Opportunity Zone funds for investment consideration at ncsha.org, with Greenwich-based Belpointe REIT the lone Connecticut-based fund but a few others lumping in Connecticut with other states where they are scouting qualifying investments.
“REITs coming together for economic Opportunity Zones are interesting and potentially huge tax shelters,” Meek says. “These REITs took some time to organize after [the Tax Cuts and Jobs Act].”