Year-End Tax Planning Moves for Individuals in 2018
Things To Do Before Year-End
High Income Individuals
Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is applicable to Net Investment Income (NII) when a taxpayer’s Modified Adjusted Gross Income (MAGI) is greater than $250,000 for those who are married and filing joint returns, $125,000 for those married and filing separately, and $200,000 for those filing as single or head of household. As the end of the year nears, you can avoid this surtax by reducing your MAGI so you will not exceed the threshold or by delaying receipt of NII. MAGI can also be reduced by increasing pension deferrals or IRA contributions.
The 0.9% additional Medicare tax also applies to higher income earners. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 for all others. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. Those who are close to the threshold may want to consider delaying the exercise of employer stock options, which would increase their taxable wages enough to exceed the threshold.
Long Term Gains
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or
20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple). Timing can be important here as it’s possible to plan your long-term capital gains to maximize yet not exceed the lowest possible long-term rate bracket. It might be possible to defer other income or increase business deductions in order to reduce income, thereby making more of your long-term gains subject to the lowest rate possible, or even a zero rate.
Good for Everyone
Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income is also desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note however, that in some cases, it may pay to actually accelerate income into 2018. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
If you have little or no taxable income this year, it might be the right time to convert your regular IRA into a ROTH IRA. Low taxable income years are perfect for this as it limits the tax cost of the conversion and allows future withdrawals to be made tax free.
Beginning in 2018, many taxpayers who claimed itemized deductions year after year may no longer be able to do so. That’s because the basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and many itemized deductions have been cut back or abolished. No more than $10,000 of state and local taxes may be deducted. Miscellaneous itemized deductions, such as, tax preparation fees, unreimbursed employee expenses, and investment advisory fees are no longer deductible. Personal casualty losses are deductible only if they’re attributable to a federally-declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses to the extent they exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, and interest deductions on a restricted amount of qualifying residence debt, but payments of those items won’t save taxes if they don’t cumulatively exceed the new, higher standard deduction.
Some taxpayers may be able to work around the new reality by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2018 deductions even if you don’t pay your credit card bill until after the end of the year.
If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2018, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2018. Remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2018 state and local tax payments to exceed $10,000.
Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
Over 70 1/2
If you are age 70-½ or older by the end of 2018, have traditional IRAs, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. The amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings, particularly if you can’t itemize your deductions.
Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you have set aside too little for this year.
Reduce Next Years Income
Make 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 made in 2018 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
If you were in an area affected by Hurricane Florence, Hurricane Michael or any other federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them on either the return for the year the loss occurred (in this instance, the 2018 return normally filed next year), or the return for the prior year (2017).
Let us show you some of the ways we can help you save money on your 2018 taxes! Just give us a call to schedule a year-end tax planning meeting.