As the end of the year approaches, it is a good time to think of planning opportunities that will help lower your tax bill. Year-end planning for 2018 takes place under the new tax law-the Tax Cuts and Jobs Act-that make major changes in the tax rules for individuals and businesses. For individuals, there are lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT), among many other changes.
Year-End Tax Planning Ideas for Individuals:
Standard Deduction - Beginning in 2018, many taxpayers who claimed itemized deductions year after year will no longer be able to do so. This is due to an increase to the basic standard deduction ($24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), coupled with many itemized deductions being dramatically decreased or eliminated. The state and local tax deduction is limited to $10,000 and the miscellaneous itemized deductions (e.g., tax preparation fees, unreimbursed employee business expenses and investment advisor fees) are no longer deductible.
Itemized Deduction Option - You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income, up to $10,000 of state and local taxes, which includes real estate and personal property taxes, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt. However, the cumulative of these items must exceed the new, increased standard deduction or you won't receive any tax benefit from them. You 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 benefit you. 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.
Charitable Deductions – The limitation for cash contributions to public charities and certain private foundations is increased from 50% to 60% in 2018. Contributions exceeding the 60% limitation are generally carried forward for up to five years.
Maximize Retirement Plan Contributions - Employer-sponsored 401(k) contribution limits increased to $18,500 for 2018, with an additional catch-up contribution for individuals over 50 of $6,000. IRA contribution limits remain the same at $5,500 with an additional catch-up contribution for individuals over age 50 of $1,000. There are retirement plan options for self-employed individuals as well so it's best to contact your tax advisor to discuss your options.
IRA Distributions - If you are age 70-½ or older by the end of 2018 and have traditional IRAs consider making 2018 charitable donations via qualified charitable distributions from your IRAs. If IRA distributions are made directly to charities the amount of the contribution is neither included in your gross income nor deductible as a charitable donation. For charitably-inclined individuals, this is an especially powerful tool if you will not itemize in 2018 since the amount of the qualified charitable distribution isn't included as a charitable donation and decreases both your gross income and your total tax liability.
Required Minimum Distributions - Don't forget to take required minimum distributions (RMDs) from your IRA or 401(k) plans (or other employer-sponsored retirement plan). While the RMD rules haven't changed with the Tax Cut and Jobs Act, there are some good reminders. RMD's from IRAs must begin by April 1 of the year following the year you reach age 70-½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70-½ in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019 - the amount required for 2018 plus the amount required for 2019. Think twice before delaying 2018 distributions to 2019, as bunching income into 2019 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2019 if you will be in a substantially lower bracket that year.
Defer Income - It may be more advantageous to defer income like bonuses 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 also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, that in some cases, it may be beneficial to 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.
Prepay Deductions - Similar to deferring income, it may more economic sense to consider using a credit card to pay deductible expenses before the end of the year. This will increase your 2018 deductions even if you don't pay your credit card bill until January of 2019.
Pre-Tax Savings Plan - Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) or health savings accounts (HSA) if you set aside too little in the current year. If you become eligible in December of 2018 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2018.
Education Plans - Qualified distributions up to $10,000 per year from 529 Plans can be used for elementary or secondary education in addition to higher education costs. Many states also offer state tax deductions to residents for contributions made to qualified 529 plans. The state tax deduction varies by state so please contact your tax advisor with questions regarding optimizing this deduction.
Gifts - The annual gift exclusion increased to $15,000 per individual for gifts made in 2018. Married couples can jointly gift $30,000 to any one individual. 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. You can also still pay medical bills and tuition payments directly to the medical facility or school for an individual without these payments classified as gifts. Please note that gifts made above the annual exclusion amount must be reported on a gift tax return.
These are just some of the year-end steps that can be taken to save taxes. Please contact your MarksNelson advisor at 816-743-7700 to discuss how to best plan for your individual needs.