2018 Year End Tax
Planning
December is always a good time to evaluate
your tax situation and see what you can do to lower your taxes. 2018 brings
extensive changes as a result of the large tax overhaul passed by Congress last
December.
Here’s a quick recap of some of the more
significant changes and some thoughts on how to reduce your tax bill.
One of the biggest items in the tax reform is
lower tax rates. In general, but not always, tax rates will be lower across the
board for all levels of income in 2018 vs. 2017.
Two of the major changes in the tax law are
the elimination of the personal exemption deductions, and the increase in the
standard deduction. The standard
deduction was raised to $24,000 for joint filers, $18,000 for heads of
household, and $12,000 for single filers.
To compensate for the repealed personal exemptions
for dependents, the child tax credit was increased to $2,000 ($1,400 is
refundable) for each child 16 and under, and the Adjusted Gross Income (“AGI”)
phase out threshold was increased to $400,000 for joint filers and $200,000 for
all others. In addition, a $500
nonrefundable credit is available for dependents over 16.
The deduction for state and local income taxes
and real estate property taxes is now capped at an aggregate total of $10,000.
In addition, the deduction for miscellaneous deductions over 2% of your AGI was
eliminated (e.g. investment advisor fees, tax preparation fees, unreimbursed
business expenses, etc.).
Mortgage interest on combined acquisition
indebtedness over $750,000 obtained after December 14, 2017, is no longer
deductible. For indebtedness incurred
before December 15,2017, mortgage interest is deductible up to combined
indebtedness of $1,000,000. Interest on
home equity lines is deductible if the indebtedness was used to purchase, buy
or improve the home secured by the loan.
Medical, dental and vision expense can be
deducted if you are able to itemize deductions and they exceed 7.5% of your AGI
for 2018. After 2018, such expenses must
exceed 10% of your AGI.
In 2018, fewer taxpayers will be subject top
the alternative minimum tax (AMT) as a result of increases in the exemption
amounts and higher exemption phaseout levels.
Here are some basic things you should consider
doing before December 31, 2018:
· Charitable
Contributions: Whether it makes sense to take an itemized
deduction for your charitable contributions depends on whether your total
itemized deductions exceed your standard deduction.
Taxpayers, who must take required minimum
distributions from an IRA, can make a charitable contribution directly from
your IRA to a charity. Making the contribution to the charity counts as your
required minimum distribution but that amount is not included in your taxable income
and lowers your AGI. This is called a
Qualified Charitable Distribution or “QCD”.
QCDs have many benefits. First, if you are not able to itemize
deductions, you are still able to reduce your taxable income for the charitable
donation. Second, if you are able to
itemize deductions, your ability to deduct medical expense depends on your AGI,
so a lower AGI could benefit you. Third, as your AGI increases, more of your
social security income is subject to tax and your Medicare premiums can
increase. And lastly, the 3.8% net investment income tax applies to the extent
your AGI exceeds a certain level. A
lower AGI could mean a lower net investment income tax.
Another idea is to set up a Donor Advised Fund
(“DAF”) for charity. You can donate as much as you want in 2018, subject
to certain tax deduction limits, and then have the DAF disburse funds to your
desired charities over the next several years.
If you have appreciated stock that you can
donate, this is a double tax savings. You will be able to deduct the FMV
of the stock donated on your tax return and won’t be taxed on the capital gain. This will also avoid the 3.8% net investment
income tax, if applicable.
We sent out a list of the Arizona tax credit
donations available in 2018 with our holiday cards. If you would like a copy of
that list, please let us know. While the
IRS changed the law mid-year in 2018 to make the credit contribution
non-deductible, the benefit on your Arizona tax return remains dollar for
dollar.
· Retirement Plan Considerations: Fully funding your company 401(k) will reduce
your current year taxes, as well as increase your retirement nest egg. For 2018, the maximum contribution is $18,500, and for taxpayers age 50 or older, $24,500.
If certain requirements are met, contributions
to an IRA may be deductible. The maximum contribution amount for 2018 is
$5,500, for taxpayers 50 for older but less than 70 1/2, $6,500.
If you are a business owner or sole
proprietor, you may want to consider establishing a SEP IRA or Solo 401k. These
plans will allow you to contribute significant amounts to the plan and take the
contribution as a tax deduction.
Depending on your situation, you may be able to deduct up to $55,000 in
2018.
· Medicare Premiums and your “MAGI”: If you
are on Medicare and your modified adjusted gross income
(“MAGI”) is more than $85,000(single) or
$170,000 (married filing joint), then you will pay higher Medicare
premiums. MAGI is your regular AGI plus
tax exempt income.
Managing your MAGI to stay under the brackets
may save you thousands of dollars a year in Medicare premiums. Click on this
link to access the MAGI brackets on the Social Security website.
· ROTH
IRA Conversions: If you already
have a traditional/rollover IRA, you should evaluate whether it is appropriate
to convert it to a Roth IRA this year. You’ll have to pay tax on the amount
converted in 2018, but subsequent earnings will be free of tax and with the
decrease in tax rates this year, a conversion is less costly than it has been
in previous years.
· Capital Gains and Losses: ‘Tis the season to harvest capital losses.
Especially, this year with the market volatility, you may have investments that
have a loss at this point. Selling those investments before the end of the year
will realize the loss this year and provide at least a tax benefit for the
loss. You must not buy back that investment for 31 days because of the wash
sale rules in order to claim the loss on your taxes. Oftentimes, you can find a
replacement investment that will act similarly to the one you sell if you want
to keep your money invested for those 30 days.
After the wash sale period, you can buy back that investment if you
want.
· Accelerating Income or Expenses in 2018/Deferring
Income or Expenses into 2019: If you are projecting a significant change in your
income level from 2018 to 2019, it may benefit you to either accelerate some of
your 2019 income into the current year if 2019 will be significantly higher
than 2018. Or, if 2019 will be significantly less than 2018, it may make sense
to defer into 2019 to even out the income levels.
Similarly, if you expect an increase in
your 2019 income, it may be advantageous to push deductions into 2019. And vice
versa, if you expect your 2019 income to decrease, consider accelerating
deductions in 2018.
This article is a
summary of 2018 year end strategies to consider. It does not necessarily cover
all potential strategies or tax issues. Your individual circumstances will
matter, and you should consult your advisors regarding any of the above
strategies. This article does not constitute tax or legal advice.
