Are you making your list and checking it twice?
With the holiday season in full gear, it’s perfect timing to review your year-end planning strategy. There is still time to make your last-minute decisions to lower your 2018 tax liability or contribute to your favorite charity. Here is a list of planning ideas to review.
- Qualified Business Income Deduction
Beginning in 2018, taxpayers other than corporations may be entitled to a Section 199A deduction of up to 20% of their qualified business income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. Consider planning whether to select Section 179 and/or bonus depreciation methods and the tax impact of lowering qualified business income to avoid some of the Section 199A limitations.
The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500. Please note for years beginning in January 1, 2019, the limitations are phased in for joint filers with taxable income between $321,450 and $421,450, married filing separately with taxable income between $160,425 and $210,425, and for all other taxpayers the limitations are phased in with taxable income between $160,700 and $210,700.
- Itemized Deductions
Beginning in 2018, many taxpayers who claimed itemized deductions yearly may no longer be able to do so. The basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for single, $18,000 for heads of household, and $12,000 for married filing separately), and many itemized deductions have been cut back or eliminated. Under the TCJA, for tax years 2018 through 2025, the deduction for state and local income, sales and property taxes is limited to $10,000 in the aggregate ($5,000 for married filing separately). However, there is no limitation on state and local property taxes paid or accrued in carrying on a trade or business to produce income. Note that this $10,000 cap does not affect “investment interest.” That remains deductible as an itemized deduction, to the extent of net investment income.
- Medical Expenses and Miscellaneous Itemized Deductions
You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income. Interest deductions on a restricted amount of qualifying residence debt won't save taxes if they don't cumulatively exceed the new, higher standard deduction. Miscellaneous itemized deductions (e.g., tax preparation fees) and unreimbursed employee expenses are no longer deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. The 2019 standard deductions also increased to ($24,400 for joint filers, $ 12,200 for single, $18,350 for head of household and $12,200 for married filing separate). Some taxpayers may be able to work around the loss of itemized deductions by applying a "bunching strategy" to pull or push discretionary medical expenses and charitable contributions into later years to benefit from the itemized deductions. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years' worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
- Charitable Donations
Charitable donations of appreciated publicly traded securities, such as stocks and mutual funds are still a great strategy to lower your tax liability. Appreciated securities held for more than one year and donated directly to a public charity or a donor-advised fund account may be donated without recognizing any capital gain and are generally deductible, for those who itemize, at fair market value. The percentage of adjusted gross income limit on the deduction for cash gifts to public charities increased from 50 to 60% in 2018. It is still effective to donate appreciated long-term, publicly traded stocks to charity because, while there are some percentage of income limitations to review, the donation is relatively easy to accomplish and yields a deduction measured by current value. The donation is the full fair market value because the capital gain is never recognized, since the listed securities will eventually be sold by the exempt organization. However, the charitable deduction can have the effect of reducing the benefit of the 20% of business income deduction. You will need to evaluate how the contribution may impact the projected 20% of business income deduction, since the determination is affected by a taxable income limitation, not just the amount of business income.
- Alternative Minimum Tax (AMT)
If you will be paying AMT in 2018 but do not expect to do so in 2019, you might consider accelerating ordinary income into 2018 so that it is taxed at 28% rather than 37% or higher. For example, if you are considering exercising nonqualified stock options, exercising a portion in 2018 might reduce taxes overall if that income would be taxed at the marginal AMT rate of 28% in 2018 rather than 37% in 2019. (You need to be careful not to exercise so many options that it causes you to no longer be subject to AMT.) If you will be paying AMT in 2018 but not 2019, deferring certain deductions can also be beneficial.
- Charitable Distributions from IRAs
If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. The qualified retirement distributions (QRD) are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings.
- Required Minimum Distributions
Don’t forget to take required minimum distributions (RMDs). Taxpayers who are at least age 70-1/2 must take a 2018 RMD from their IRAs, 401(k) plans or other employer-sponsored retirement plans before year end. Failure to do so can bring a penalty of 50% of the amount of the RMD that should have been withdrawn. If you turned 70-1/2 in 2018, you can delay the first distribution to April 1, 2019, but you’ll need to take another RMD before the end of 2019. This makes sense if you expect to pay a lower tax rate next year.
- Treatment of Alimony
Prior to 2018, alimony and separate maintenance payments were deductible by the payor and includible in income by the recipient. Under the TJCA, alimony is non-deductible to the payor and non-taxable to the recipient. However, the new tax treatment of alimony is generally effective for any divorce or separation agreement executed after December 31, 2018. Therefore, any divorce or separation agreement executed before year end will remain subject to the pre-TJCA rule. In addition, the TJCA states that any divorce or separation instrument executed on or before December 31, 2018 can still be subject to the new rules if the agreement is modified after December 31, 2018 and the modification expressly provides that the new rules apply.
- Health Savings Accounts (HSA)
If you established a Health Savings Account (HSA) in 2018, you have until April 15, 2019 to contribute funds to the account. The funds you contribute to an HSA are tax deductible, any earnings are federal tax-free, and distributions may be tax free if used to pay for qualified medical expenses. HSA funds may roll over year-to-year if they aren’t spent. For 2018, if you have self-only HDHP (high-deductible health plan) coverage, you can contribute up to $3,450. If you have family HDHP coverage, you can contribute up to $6,900. There is also a catch-up contribution limit of $1,000 if you are 55 or older.
- Gift and Estate Taxes
Consider making gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. Remember, a holiday gift of a check that doesn’t get deposited until after New Year’s Day is considered a gift in 2019. A cashier’s check can avoid this, since a gift of a cashier’s check, like cash, is complete upon delivery.
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