You likely know that, last year in December 2017, Congress enacted the biggest tax reform law in 30 years with the passage of the Tax Cuts and Jobs Act. The law is complex and makes sweeping changes in the way individuals will determine taxable income and taxes due for 2018 and beyond. There are some actions which can be taken now, prior to year- end, to minimize your 2018 tax liability. However, these suggestions are not applicable for everyone and they should be checked with us before utilizing any of these strategies.
2018 Last-Minute Year-End Timing of Income and Deductions Strategies
Why pay tax now when you could pay later?
Generally, you want to accelerate deductions and defer income. The theory being that money is more valuable today than in the future, but that assumes that the marginal tax rate is identical in future years. There are opportunities for taxpayers to accelerate or defer both items of income and deductions. Potential items of income that a taxpayer can control to a degree include bonuses, consulting income or self-employment income. On the deduction side, taxpayers can control the timing of payments for state and local income taxes, interest payments, real estate taxes and charitable contributions. It is worthwhile to note that bills paid with a credit card are deductible in the year they are charged to the credit card even though you may not pay the credit card bill until after the end of the tax year.
2018 Last-Minute Year-End Itemized Deduction Strategies
One of the biggest impacts of the new law is the increase in the standard deduction. For 2018, the standard for individuals is $12,000 and for married filing joint the deduction is $24,000. This will mean that many taxpayers who have historically itemized their deductions will now be claiming the standard deductions.
Below are some strategies to manage your deductions to achieve the lowest income tax possible.
Strategy 1: Bunch Itemized Deductions
If your itemized deductions fall short of standard deduction amount, you should consider bunching your itemized deductions into alternating years. Under the bunching strategy you would double up on an itemized deduction (such as contributions) in one year so that your itemized deductions are in excess of the standard deduction and then in the net year, make no contributions and claim the standard deduction.
Strategy 2: Make Charitable Contributions
Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year. Remember that you must have receipts for charitable donations for them to be deductible.
Consider doing one or all of the following:
- Donate appreciated stock.
- Prepay (before December 31) your planned 2019 charitable contributions so you can claim them as deductions this year.
- Create a Donor Advised Fund. These allow you to contribute a sizeable amount of money, which you can deduct this year, to a fund for charitable donations that you control.
New Law Changes that May Hurt You
While the increased standard deduction and lower overall tax brackets will benefit most tax payers, a few of the new law changes will likely be to your disadvantage. Keep these in mind as you plan for the end of the year:
- Your deductions for state and local taxes will be limited to $10,000.
- Mortgage interest is limited to mortgages of no more than $750,000.
- Miscellaneous itemized deductions subject to the 2% limit were eliminated. This means unreimbursed employee business expenses and investment expenses, among other things, will no longer be deductible.
2018 Last-Minute Year-End Tax Strategies for Your Stock Portfolio
The beauty of tax planning your year-end stock portfolio is that it might cost you pennies in commissions but allow you to pocket real money.
Here’s the basic strategy:
- Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
- Lower the taxes to zero—or if you can’t do that, then lower them to 23.8 percent or less by making the profits subject to long-term capital gains.
Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.
Examine your portfolio for stocks that you want to unload, and make sales where you offset short-term gains subject to a high tax rate such as 40.8 percent with long-term losses (up to 23.8 percent). In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.
Use long-term losses to create the $3,000 deduction allowed against ordinary income. Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower income tax bracket).
As an individual investor, avoid the wash-sale loss rule. Under the wash-sale loss rule, if you sell a stock or other security and purchase substantially identical stock or securities within 30 days before the date of sale or after the date of sale, you don’t recognize your loss on that sale. Instead, the code makes you add the loss amount to the basis of your new stock.
If you want to use the loss in 2018, then you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.
If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains. If you sell stocks to purge the capital gains, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.
Important. Don’t die with large capital loss carryovers—they’ll disappear.
- If your carryover originated from you only, then it all goes away if not used on your joint return in the year of your death.
- If your carryover came from joint assets, then your surviving spouse gets 50 percent of the carryover to use going forward.
Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)? If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by
- gifting them stock,
- having them sell the stock, and then
- having them pay taxes on the stock sale at their lower tax rates.
If you are going to make a donation to a charity, consider appreciated stock rather than cash because a donation of appreciated stock gives you more tax benefit. It works like this:
- Benefit 1. You deduct the fair market value of the stock as a charitable donation.
- Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.
If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.
Solution. Sell the stock first to create your tax-deductible loss. Then give the charity the cash realized from your sale of the stock to create your deduction for the charitable contribution.
2018 Last-Minute Year-End Medical and Retirement Deductions
When you get busy, it’s easy to forget about your retirement accounts and medical coverages and plans. But year-end is approaching, and now’s the time to take action.
Included below are six action steps for 2018 that can help you reduce your taxes and pocket extra money.
- Consider making the maximum allowable contribution to your retirement accounts. For employer plans, your contributions must be made before year-end. IRA contributions can be made until April 15, 2019.
- Consider converting to a Roth IRA. The long-term savings here can be huge. Make sure to leave the converted funds in the Roth for at least five years.
- If you have a Section 105 plan in place and you have not been reimbursing expenses monthly, do a reimbursement now to get your 2018 deductions, and then put yourself on a monthly reimbursement schedule in 2019.
2018 Last-Minute Year-End Tax Strategies for Marriage, Kids, and Family
Here are five year-end tax-deduction strategies that apply if you are getting married or divorced and/or have situations where you give money to relatives and friends.
- Get Divorced after December 31
The marriage rule works like this: you are considered married for the entire year if you are married on December 31. Although lawmakers have made many changes to eliminate the differences between married and single taxpayers, in most cases the joint return will work to your advantage. Thus, wait until next year to finalize the divorce if alimony is not involved.
Warning on alimony! The Tax Cuts and Jobs Act (TCJA) changed the tax treatment of alimony payments under divorce and separate maintenance agreements executed after December 31, 2018:
Under the old rules, the payor deducts alimony payments and the recipient includes the payments in income.
Under the new rules, which apply to all agreements executed after December 31, 2018, the payor gets no tax deduction and the recipient does not recognize income. And if you are married on December 31, don’t file in April as married, filing separately. In most cases, this is a sure way to overpay your taxes.
- Get Married on or before December 31
Remember, if you are married on December 31, you are married for the entire year. If you are thinking of getting married in 2019, you might want to rethink that plan for the same reasons that apply in a divorce (as described above). The IRS could make big savings available to you if you are married on December 31, 2018.
Again, you have to run the numbers in your tax return both ways to know the tax benefits and detriments for your particular case. A quick trip to the courthouse may save you thousands.
- Make Use of the 0 Percent Tax Bracket
In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24. But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?
If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? The 0 percent capital gains tax bracket applies to a single person with less than $37,650 in taxable income and to a married couple with less than $75,300 in taxable income. If the parent or other loved one is in the zero capital gains tax bracket, you can get extra bang for your buck by giving this person appreciated stock rather than cash.
2018 Last-Minute Year-End Annual Gift Tax Exclusions
Consider making gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes when an income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
These are just some of the year-end steps that can be taken to save taxes. Remember these strategies are based on general assumptions and may not apply to everyone. If you believe any of these strategies could apply to you, please contact us at Rikard & Neal so we can tailor a particular plan that will work best for you.