With year-end
approaching, now is the time to take steps to cut your 2018 tax bill. Here are
some relatively foolproof year-end tax planning strategies from your Blue Springs tax preparation office to consider, taking
into account changes included in the Tax Cuts and Jobs Act (TCJA).
Year-end Planning Moves for Individuals
Game the
Increased Standard Deduction Allowances. The
TCJA almost doubled the standard deduction amounts. For 2018, the amounts are $12,000
for singles and those who use married filing separate status (up from $6,350
for 2017), $24,000 for married joint filing couples (up from $12,700), and $18,000
for heads of household (up from $9,350). If your total annual itemizable
deductions for 2018 will be close to your standard deduction amount, consider
making additional expenditures before year-end to exceed your standard
deduction. That will lower this year’s tax bill. Next year, you can claim the
standard deduction, which will be increased a bit to account for inflation.
The easiest
deductible expense to accelerate is included in your house payment due on
January 1. Accelerating that payment into this year will give you 13 months’
worth of interest in 2018. Although the TCJA put new limits on itemized
deductions for home mortgage interest, you are probably unaffected. Check with
us if you are uncertain.
Also, consider state
and local income and property taxes that are due early next year. Prepaying
those bills before year-end can decrease your 2018 federal income tax bill
because your itemized deductions will be that much higher. However, the TCJA
decreased the maximum amount you can deduct for state and local taxes to
$10,000 ($5,000 if you use married filing separate status). So, beware of this
new limitation.
Accelerating other
expenditures could cause your itemized deductions to exceed your standard
deduction in 2018. For example, consider making bigger charitable donations
this year and smaller contributions next year to compensate. Also, consider
accelerating elective medical procedures, dental work, and vision care. For
2018, medical expenses are deductible to the extent they exceed 7.5% of Adjusted
Gross Income (AGI), assuming you itemize.
Warning: The state and local tax prepayment drill can be a bad idea if you owe Alternative
Minimum Tax (AMT) for this year. That’s because write-offs for state and local
income and property taxes are completely disallowed under the AMT rules.
Therefore, prepaying those expenses may do little or no good if you are an AMT
victim. Contact us if you are unsure about your exposure to the AMT.
Carefully Manage
Investment Gains and Losses in Taxable Accounts. If you hold
investments in taxable brokerage firm accounts, consider the tax advantage of
selling appreciated securities that have been held for over 12 months. The
maximum federal income tax rate on long-term capital gains recognized in 2018
is only 15% for most folks, although it can reach a maximum of 20% at higher
income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at
higher income levels.
To the extent you have capital losses that were
recognized earlier this year or capital loss carryovers from pre-2018 years,
selling winners this year will not result in any tax hit. In particular,
sheltering net short-term capital gains with capital losses is a sweet deal
because net short-term gains would otherwise be taxed at higher ordinary income
rates.
What if you have some loser investments that you would
like to unload? Biting the bullet and taking the resulting capital losses this
year would shelter capital gains, including high-taxed short-term gains, from
other sales this year.
If selling a bunch of losers would cause your capital
losses to exceed your capital gains, the result would be a net capital loss for
the year. No problem! That net capital loss can be used to shelter up to $3,000
of 2018 ordinary income from salaries, bonuses, self-employment income,
interest income, royalties, and whatever else ($1,500 if you use married filing
separate status). Any excess net capital loss from this year is carried forward
to next year and beyond.
In fact, having a capital loss carryover into next
year could turn out to be a pretty good deal. The carryover can be used to
shelter both short-term and long-term gains recognized next year and beyond.
This can give you extra investing flexibility in those years because you won’t
have to hold appreciated securities for over a year to get a preferential tax
rate. Since the top two federal rates on net short-term capital gains
recognized in 2019 and beyond are 35% and 37% (plus the 3.8% NIIT, if
applicable), having a capital loss carryover into next year to shelter
short-term gains recognized next year and beyond could be a very good thing.
Watch out for the
AMT. The TCJA significantly
reduced the odds that you will owe AMT for 2018 by significantly increasing the
AMT exemption amounts and the income levels at which those exemptions are
phased out. Even if you still owe AMT, you will probably owe considerably less
than under prior law. Nevertheless, it’s still critical to evaluate year-end
tax planning strategies in light of the AMT rules. Because the AMT rules are
complicated, you may want some assistance. We stand ready to help.
Don’t Overlook
Estate Planning. The unified federal
estate and gift tax exemption for 2018 is a historically huge $11.18 million,
or effectively $22.36 million for married couples. Even though these big
exemptions may mean you are not currently exposed to the federal estate tax,
your estate plan may need updating to reflect the current tax rules. Also, you
may need to make some changes for reasons that have nothing to do with taxes.
Contact us if you think you could use an estate planning tune-up.
Year-end Planning Moves for
Small Businesses
Establish a Tax-favored Retirement Plan. If your business doesn’t already have a
retirement plan, now might be the time to take the plunge. Current retirement
plan rules allow for significant deductible contributions. For example, if you
are self-employed and set up a SEP-IRA, you can contribute up to 20% of your
self-employment earnings, with a maximum contribution of $55,000 for 2018. If
you are employed by your own corporation, up to 25% of your salary can be
contributed with a maximum contribution of $55,000.
Other small business
retirement plan options include the 401(k) plan (which can be set up for just
one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on
your circumstances, these other types of plans may allow bigger deductible
contributions.
The deadline for
setting up a SEP-IRA for a sole proprietorship and making the initial
deductible contribution for the 2018 tax year is 10/15/19 if you extend your
2018 return to that date. Other types of plans generally must be established by
12/31/18 if you want to make a deductible contribution for the 2018 tax year,
but the deadline for the contribution itself is the extended due date of your
2018 return. However, to make a SIMPLE-IRA contribution for 2018, you must have
set up the plan by October 1. So, you might have to wait until next year if the
SIMPLE-IRA option is appealing.
Contact us for more
information on small business retirement plan alternatives, and be aware that
if your business has employees, you may have to cover them too.
Take Advantage of
Liberalized Depreciation Tax Breaks. The TCJA included a number of very favorable
changes to the depreciation tax rules, including 100% first-year bonus
depreciation for qualifying assets and much more generous Section 179 deduction
rules. Contact us for details on eligible assets and how your business can take
advantage of these new changes.
Time Business Income and Deductions for Tax
Savings. If you conduct your business
using a pass-through entity (sole proprietorship, S corporation, LLC, or
partnership), your shares of the business’s income and deductions are passed
through to you and taxed at your personal rates. Assuming the current tax rules
will still apply in 2019, next year’s individual federal income tax rate
brackets will be the same as this year’s (with modest bumps for inflation). In
that case, the traditional strategy of deferring income into next year while
accelerating deductible expenditures into this year makes sense if you expect
to be in the same or lower tax bracket next year. Deferring income and
accelerating deductions will, at a minimum, postpone part of your tax bill from
2018 until 2019.
On the other hand,
if you expect to be in a higher tax bracket in 2019, take the opposite
approach. Accelerate income into this year (if possible) and postpone
deductible expenditures until 2019. That way, more income will be taxed at this
year’s lower rate instead of next year’s higher rate. Contact us for more
information on timing strategies.
Maximize the New Deduction for Pass-through
Business Income. The new
deduction based on Qualified Business Income (QBI) from pass-through entities
was a key element of the TCJA. For tax years beginning in 2018–2025, the
deduction can be up to 20% of a pass-through entity owner’s QBI, subject to
restrictions that can apply at higher income levels and another restriction
based on the owner’s taxable income. The QBI deduction also can be claimed for
up to 20% of income from qualified REIT dividends and 20% of qualified income
from publicly-traded partnerships.
For QBI deduction
purposes, pass-through entities are defined as sole proprietorships,
single-member LLCs that are treated as sole proprietorships for tax purposes,
partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations.
The QBI deduction is only available to noncorporate taxpayers (individuals,
trusts, and estates).
Because of the
various limitations on the QBI deduction, tax planning moves (or nonmoves) can
have the side effect of increasing or decreasing your allowable QBI deduction.
So, individuals who can benefit from the deduction must be really careful at
year-end tax planning time. We can help you put together strategies that give
you the best overall tax results for the year.
Claim 100% Gain Exclusion for Qualified Small
Business Stock. There is a
100% federal income tax gain exclusion privilege for eligible sales of Qualified
Small Business Corporation (QSBC) stock that was acquired after 9/27/10. QSBC
shares must be held for more than five years to be eligible for the gain
exclusion break. Contact us if you think you own stock that could qualify.
Conclusion
This letter only
covers some of the year-end tax planning moves that could potentially benefit
you and your business. Please contact us if you have questions, want more
information, or would like us to help in designing a year-end planning package
that delivers the best tax results for your particular circumstances.
