Year-end Planning Tips to Take Advantage of the Tax Law Change

Expert Advice from Tax Partner, Karen Delle Site

We have all heard much about the new Tax Cuts and Jobs Act that was passed late in 2017; with lower income tax rates for individuals and businesses. With so many changes, year-end planning is more important than ever this year!

It is important to consider the special circumstances that many taxpayers may have, in order to fully take advantage of such a sweeping tax law change. We welcome meetings during this time of year with our clients, so we can understand each situation and bring our knowledge to bear in meeting clients’ goals.

• Net Investment Income surtax of 3.8% on certain unearned income such as interest, dividends and capital gains. If modified adjusted gross income is high enough, deferral of these items should be considered, where possible.

• Additional Medicare tax of 0.9% on higher-income earners may require a higher withholding at the end of the year; or perhaps a bonus can be deferred to the following year.

• Long-term capital gains from asset sales held more than one year are taxed at 0%, 15%, or 20%, depending on taxable income. The 0% rate applies to long-term capital gain over short-term capital loss and is limited to $77,200 for a married couple. Hopefully, investment advisors are aware of this, but a conversation should be had to ensure any short-term losses that could be harvested consider this 0% rate.

• Consider changing financial circumstances from 2018 to 2019 (i.e. retirement, divorce, etc.) as well as filing status changes such as head of household versus single. Should income be accelerated or deferred? Will deductions and credits such as IRA contributions, child tax credits, higher education tax credits, and student loan interest deductions phase out if income is too high this year? Will a more favorable tax rate apply next year? All important questions to ask this time of year.

• Since rates have gone done, it is a good time to consider whether converting a traditional IRA to a Roth IRA is appropriate; especially if the funds the traditional IRA invested in have not performed well.

• The standard deduction has doubled so many will no longer itemize if those deductions are less than the standard deduction. Sounds like a great deal, right? But for those with children at home, not so much, since the personal exemptions are gone at $4,050 per household member.  As an example: married filing joint taxpayers under 65 years of age with no children can take $24,000 as a standard deduction, which is an increase of about $4,000 over 2017 ($12,000 standard plus $8,100 of personal exemptions) so still helpful. 

• Other changes to allowable itemized deductions was to eliminate miscellaneous deductions for tax preparation fees, investment advisory fees and unreimbursed employee business expenses. State and local taxes (including property taxes) are limited to $10,000. Medical expenses are still subject to 7.5% of adjusted gross income, you can still deduct mortgage interest on up to $750,000 of debt, and you can still deduct charitable contributions up to 50% of your adjusted gross income. 

• The increase in the standard deduction has also caused already strapped non-profit organizations to be concerned that people only donate when they get a tax deduction for it. An alternative for those who are taking Required Minimum Distributions from retirement accounts, and do not need the funds, consider having your investment advisor send some of it to your designated charity. It is called a Qualified Charitable Distribution and keeps the amount from being reportable as income to you. That way you still can get the benefit of supporting charities even if you take the standard deduction.

• Again, consider changing circumstances in 2019. If you can itemize this year, but will not do so in 2019, consider bunching expenses into 2018 to take advantage of two years worth of deductions.

• Consider paying deductions with a credit card that will not be due until 2019, since you can still deduct them without the cash flow.

• Don’t forget to review amounts set aside in your employer’s health flexible spending account (FSA) if you didn’t put enough in for 2018.

• If you are eligible for a health savings account (HSA) late in the year, consider making a full year’s worth of contributions for 2019 in 2018.

As you can see, there are many opportunities to be discussed, so give us a call to set up your planning meeting!