Year-end planning for 2018 takes place against the backdrop of a new tax law – the Tax Cuts and Jobs Act – that makes major changes in the tax rules for individuals and businesses. Tax planning is now more important than ever.
Below are some key strategies and items to consider. Additional information on these and other planning techniques can be found in our full 2018-2019 Tax Planning Guide.
- Income deferral is a key tax planning strategy in any year. If you anticipate being taxed in 2019 at more favorable rates, the following may be some helpful strategies:
- If you are an employee who thinks a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
- If you are thinking of converting a regular IRA to a Roth IRA, postpone the change until next year. However delaying conversion could result in higher income if the investment appreciates.
- If you run a service business that operates on the cash basis, consider delaying billings to ensure that payments are not received until next year.
- The new tax law made significant changes to itemized deductions and increased the standard deduction that is available to all taxpayers.
- State and local tax deductions have been capped at $10,000, interest on home equity loans is not deductible (unless used to buy, build, or improve the home), and most miscellaneous itemized deductions (such as investment management, unreimbursed employee expenses, and tax preparation) have been eliminated.
- The increased standard deduction also reduces the benefit of itemizing.
- One strategy to obtain maximum benefit from your itemized deductions is to bunch your deductions into a single year. For example, make two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019. This could allow you to take a large itemized deduction in one year and the standard deduction in the other.
- The use of direct charitable contributions from Required Minimum Distribution (RMD) is another way to get a tax break for giving. Taxpayers who must take RMD’s from their retirement accounts will want to consider this option.
- Consider donating appreciated assets to charity. This provides a way to increase your deduction and avoid the capital gains tax on the transfer.
- If you are a business owner, the new deduction for Qualified Business Income could provide significant tax savings. This deduction is based on 20% of Qualified Business Income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, certain limitations will apply, based on type of business, W-2 wages, and basis of assets. Business owners will want to look at whether they can do anything to avoid these limitations or otherwise increase their deduction.
- Additional opportunities for business owners to consider include expanded provisions for expensing assets and greater access to the cash method of accounting. But they must also be wary of the elimination of the deductions for entertainment expenses and certain employee benefits.
- As in previous years, higher-income earners must be wary of the 3.8% surtax on certain unearned income and 0.9% additional Medicare tax. Individuals who may be subject to these taxes should consider additional strategies or increased withholding.
- Exemptions for dependents are no longer allowed for federal tax purposes. But the blow will be softened by an expanded child tax credit (increased to $2,000 and made available to higher income taxpayers), as well as a new credit for other dependents.
Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. Please contact us at firstname.lastname@example.org so we can tailor these strategies to your unique situation.