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To compensate for the repealed personal exemptions for dependents, the child tax credit was increased to $2,000 ($1,400 is refundable) for each child 16 and under, and the Adjusted Gross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.