2018 Year-End Individual Tax Planning

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2018 Year-End Individual Tax Planning

Year end tax planning for the 2018 tax year may be more complex and challenging than in prior years.  The most immediate advice we can provide is…. plan and be prepared. 

The federal tax reform bill commonly known as the Tax Cuts and Jobs Act of 2017 (“Tax Act”) contained countless tax planning opportunities as well as pitfalls.  Below we have compiled a list of items that may require youto take action before the end of 2018.  Please review the following list and contact us to discuss the benefit and/or your eligibility before you consider taking any action to save or defer taxes.  The tax implications with a number of Tax Act changes can be very complex and must be thoughtfully considered in advance.

  • Lower marginal tax brackets:  The 2018 marginal tax brackets have been reduced in comparison to the prior year, which may provide some opportunity for individuals to recognize previously deferred income before these temporary rates expire in 2025.  Note that the rate and computation of capital gains tax no longer correlates to your income tax bracket.
  • Higher Alternative Minimum Tax (AMT) exemption and phaseout:   Fewer people will be subject to AMT for tax years 2018 through 2025.  The Tax Act modestly increases the individual AMT exemption amounts for tax years 2018 through 2025, but significantly increases the income thresholds in which the exemption is phased out.
  • Less itemized deductions allowable:  Many planning opportunities exist in an effort to retain some current or future tax benefits in light of new limitations set forth in the Tax Act.
    • Cap on state and local taxes:  The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018.  An election to capitalize taxes into the basis of unimproved and nonproductive real property could retain the future tax benefit.
    • Mortgage interest:  Mortgage interest on loans used to acquire a principal residence or second home will remain deductible; however, the total indebtedness allowance is reduced to $750,000 effective for loans taken out in 2018 or later years.  Mortgage debt in excess of this threshold may be limited.
    • Home equity interest:  All home equity interest on loans NOT used to acquire or improve your principal residence or second home is no longer deductible.  Note that this limitation applies to loans that pre-date the Tax Act as well.  Any home equity loan in which the proceeds were used to acquire or improve your primary or second home will continue to be deductible.
    • Miscellaneous itemized deductions:  There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible.  This category includes items like investment expenses, union dues, and unreimbursed employee expenses.  Some deductions may still be deductible elsewhere on your income tax return.
  • Greater standard deduction:  The limitations noted above may have less impact on you due to the expansion of the standard deduction.  The Tax Act increased the standard deduction from $6,500 to $12,000 for single filers and $13,000 to $24,000 for taxpayers who are married filing jointly.  The Tax Foundation estimates that 88% of all taxpayers required to file a tax return will claim the standard deduction in 2018.
  • Contribution of appreciated stock:  Avoid potential capital gains tax bycontributing appreciated securities to a charity.  Donating appreciated assetsentitles you to a charitable contribution, and also avoids the capital gainstax if you otherwise sold the stock.
  • Timing capital losses:  Talk with your investment adviser about carefully weighing the potential tax savings of disposal of “loss” securities you hold against taxable gains you may recognize in 2018.  Be aware that the tax benefit derived from this strategy may not outweigh the economic reality of your investment portfolio and your predesigned financial plans/goals.
  • Roth IRA conversion:  Consider converting Traditional IRA funds to a Roth IRA before year end to accumulate earnings in a Roth IRA free from future income taxes.  Although the conversion to a Roth IRA may be taxable, timing the conversion in a tax year in which your total anticipated taxable income will be less than any prior and/or subsequent tax year may be beneficial in the long term.
    • However, recharacterization of IRA contributions no longer allowed:  Under the new law, once a contribution to a regular IRA has been converted into a contribution to a Roth IRA, it can no longer be converted back (recharacterized) to “unwind” the Roth conversion.  Although a Roth IRA conversion still remains a beneficial planning tool for many taxpayers, careful consideration must now be given in advance of the conversion.
  • Retirement contributions:   Consider accelerating contributions to your employer provided retirement account up to the 2018 maximum of $18,500.  Additionally, if eligible, make contributions to Traditional, Roth, and/or SEP IRA retirement accounts to maximize current and potentially long term tax savings / deferrals.
  • Required Minimum Distributions (RMD):  Remember that you may be required to take a distribution from any retirement account (IRA, 401(k), etc.) if you are over 70 ½ years of age in 2018.  Timing options are available for your first year; thus, planning may provide tax saving opportunities.  Take time to ensure you have met or exceeded any distribution requirement for 2018 to avoid the onerous 50% penalty.
    • Qualified Charitable Distribution:  If you are 70 ½, you can make a distribution directly from your individual retirement account to contribute up to $100,000 to a qualified charity.  This opportunity avoids taxation on the distribution and will count towards your RMD for 2018.

  • Rental property tax relief:  You may be eligible for a deduction of 20% of your rental real estate income.  This new deduction aimed at passthrough businesses also offers significant opportunity for rental property owners. There are limitations based on the basis of your property assets and your income.  Maximizing this opportunity requires careful planning and may change the traditional thinking regarding asset expensing vs. capitalization.
  • Doubled estate and gift tax exemption:  The new law temporarily doubles the amount that can be excluded from these transfer taxes.  For decedents dying and gifts made from 2018 through 2025, the Tax Act doubled the base estate and gift tax exemption amount from $5 million to $10 million.  Once indexed for inflation the 2018 exemption amount is $11.18 million, and $22.36 million per married couple if portability elections and filings are completed timely.
  • Gifts before year end:  Make any gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.  You can give $15,000 in 2018 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.  The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets (if they are not subject to the kiddie tax). 
  • Kiddie tax:  Children with greater than $2,100 in unearned taxable income may be subject to trust and estate income tax rates (rather than their parents marginal tax bracket as in prior years).  Deferring or moving taxable income to your children will require more diligence on your part.  This change in the computation of kiddie tax is costly because trust and estate income tax brackets accelerate much faster in comparison to individual income tax rates.  For example, trust and estate income tax brackets reach the maximum 37% when income reaches only $12,500.
  • Withholding elections and exposure to underpayment penalties:  Consider reviewing the amount of federal income tax withholding from wages you anticipate to have at year end and consider whether you need to adjust your withholding or make an estimated tax payment before year end.  Previous versions of the federal Form W-4 were dependent on exemptions claimed on your income tax returns.The exemption deduction was repealed with the Tax Act and therefore, you and/or your employer(s) may be estimating withholding based on prior year elections unless you completed a new Form W-4 earlier in the year.
  • Health Savings Account (HSA):  If you have an IRS defined “high deductible” medical insurance plan and you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account may avoid taxation, and distributions are tax free if made for qualifying medical expenses.  Remember that contributions to a HSA account can be made through April 15th, 2019 and still be deductible on your 2018 income tax return.

Other items to considerin year end planning

  • A deduction for a personal exemption is no longer available.
  • The child tax credit was expanded to $2,000 per child and the phase out threshold increased to $400,000 for joint filers ($200,000 for single taxpayers).  The Tax Act introduced an additional $500 tax credit for other qualifying dependents, such as a qualifying parent.
  • Gains recognized on the sale of property may be deferred under IRC Section 1031 (under a qualified exchange) if it is real property (commercial or residential property or land).
  • 529 education funds can now be used to pay for K through 12 tuition expenses with a $10,000 cap annually.
  • With careful planning, taxes on capital gains can be deferred or avoided if you make an “opportunity zone” investment.
  • Effective January 1, 2019, the penalty for not maintaining minimum essential coverage required under the Affordable Care Act is reduced to zero.
  • Count the days in which your vacation home was used personally and rented to third parties as it will impact your ability to deduct the operating expenses for the home.
  • Track the miles you put on your personal vehicle for medical, charitable, and business purposes as each may be deductible to you based on published federal mileage rates.
  • Check the balance in your employer provided flexible spending account (FSA) and spend any balances before year end to avoid forfeiting the account balance.

Although we strive to provide you with applicable and valued tax planning opportunities, the magnitude of additional guidance yet to be received from the Internal Revenue Service, U.S. Treasury, and possibly from Congress in the form of technical corrections may be material.  Additionally, uncertainty in year end tax planning cascades down to the states that do not automatically conform to changes in the federal tax laws.  Therefore, subsequent developments changing the facts provided to us or differences in the final federal or state regulations once they are issued by the applicable taxing authorities may affect advice we provide.

We are happy to discuss any of the above items with you further and tailor a tax strategy that will work best for you; please contact us with any questions you may have.