Year-end 2018 sees the end of the first year of the Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the Unites States in more than 30 years. While one of the claimed benefits of tax reform was the simplification of filing and the lowering if income tax rates, there are still many steps that individuals can take that can lower their tax bills. Planning during the final weeks and months of this year involves much more –both in terms of traditional year-end strategies and strategies developed in response to developments that have taken place since last year. Here are some points to consider:
Data gathering. Year-end planning should start with data collection and a review of prior year returns. This includes information on losses or other carryovers, estimated tax installments, and items that were unusual. Conversations regarding next year should include discussions of any plans for significant purchases or dispositions, as well as any possible life cycle events.
Income tax rates. One of the most significant factors in tax planning for individuals is their tax bracket. The most direct control taxpayers have over their tax bracket rests in their ability to control the timing of income and deductible expenses. For example, taxpayers who expect to be in a lower tax bracket in 2019 should consider deferring income to 2019 and accelerating deductions into 2018. While tax brackets seem as though they will be relatively stable for the next few years, individual circumstances could mean a shift in brackets from year to year.
Investments. Taxpayers holding investments, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling toward the end of the year, as well as, exchanging appreciated assets for like-kind property in order to defer gains. Balancing tax considerations with other factors is part of the challenge in dealing with investments, including: the ordinary income tax rates, the net investment income tax rate, the capital gain rates, and the alternative minimum tax (AMT).
Income caps on benefits. Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in another year.
Life events. The biggest variables for many taxpayers impacting their year-end tax planning surrounds life events such as marriage, divorce, birth or adoption of a child, a new job or the loss of a job, and retirement. These life events may, for instance, result in a change in filing status that will affect tax liability. The possibility of significant changes and/or significant or unusual items of income or loss should also be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future and predict, if possible, any events that could trigger significant income, losses, or deductions.
2018 tax law changes. Nearly all of the provisions of TCJA came into effect during 2018. There are many new tax laws that individuals should be aware of.
- One very significant change that comes into effect January 1, 2019, is the treatment of alimony. Beginning with divorces and separation agreements entered into after December 31, 2018, alimony or separate maintenance payments are no longer deductible by the payor, nor includible in the income of the payee. This change does not affect divorce or separation agreements entered into before 2019, nor those altered after 2018 where the changed method of taxation is not expressly stated to apply.
- Medical expenses. TCJA lowered the floor for claiming deductions for medical expenses to 7.5 percent of AGI for all taxpayers, not just those aged 65 or higher, applicable to 2017 and 2018 only.
- State and local taxes. TCJA limits the deduction for state and local taxes to $10,000 per year.
- Increased standard deduction. One of the most broadly impactful provisions of TCJA was the near doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for heads of households, and $12,000 for all other individual filers. This increased amount makes it less likely that it is more advantageous for individuals to itemize deductions.
- Miscellaneous itemized deductions. TCJA eliminated miscellaneous itemized deductions for individuals. This includes deductions for unreimbursed employee expenses.
There are still actions that can be taken with regard to all of these new rules, many of which can still be completed before the end of the year.
Timing rules. Timing, and the skilled use of timing rules to accelerate and defer certain income or deductions, is the linchpin of year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered. So, too, sometimes fairly sophisticated “like-kind exchange,” “installment sale” or “placed in service” rules for business or investment properties come into play. In other situations, however, implementation of more basic concepts are just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payor, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered “in due course.”
Please feel free to call our office if you have any questions about how year-end tax planning might help you.