2018 SS+G Year-End Newsletter
As year-end quickly approaches, we want to thank you for trusting us as your tax return preparer and advisor. We truly value our relationship and hope to serve you for many years to come. It's hard to believe that almost one year has passed since President Trump signed into law the Tax Cuts and Jobs Act (TCJA). This sweeping tax package drastically changed the way federal income taxes are calculated. From brand new provisions to significantly revised forms, extra time and resources will be needed to ensure we properly report your tax situation next year.
Here are some relatively fool proof year-end tax planning strategies to consider, taking into account changes included in the Tax Cuts and Jobs Act (TCJA).
Year-end Planning for Individuals
Plan for the Increased Standard Deduction Allowances. The TCJA almost doubled the standard deduction amounts. For 2018, the amounts are $12,000 for singles and those who use married filing separate status (up from $6,350 for 2017), $24,000 for married joint filing couples (up from $12,700), and $18,000 for heads of household (up from $9,350). If your total annual itemizable deductions for 2018 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year's tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
Let's look at potential itemized deductions to consider:
The easiest deductible expense to accelerate is included in your house payment due on January 1. Accelerating that payment into this year will give you 13 months' worth of interest in 2018. Although the TCJA put new limits on itemized deductions for home mortgage interest, you are probably unaffected. Check with us if you are uncertain.
The TCJA decreased the maximum amount you can deduct for state and local taxes to $10,000 ($5,000 if you use married filing separate status). So, beware of this new limitation.
Consider accelerating elective medical procedures, dental work, and vision care. For 2018, medical expenses are deductible to the extent they exceed 7.5% of Adjusted Gross Income (AGI), assuming you itemize.
Consider making bigger charitable donations this year and smaller contributions next year to compensate.
Employees can no longer deduct unreimbursed expenses related to their jobs. If you have historically been deducting these expenses, suggest to your employer that these costs should be reimbursed how since they can get a tax deduction for them while you cannot.
Take required minimum distributions (RMDs) from your IRA or401(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. 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.
If you are age 70 ½ or older by the end of 2018, have traditional IRAs, and particularly if you cannot itemize your deductions, consider making 2018 charitable donations via qualified Charitable distributions from your IRAs.
Carefully Manage Investment Gains and Losses in Taxable Accounts
If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2018 is only 15% for most, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.
To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from pre-2018 years, selling winners this year will not result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a sweet deal because net short-term gains would otherwise be taxed at higher ordinary income rates.
What if you have some investments with losses that you would like to unload? Biting the bullet and taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains and capital gain distributions from mutual funds.
If selling a bunch of losses would cause your capital losses to exceed your capital gains, the result would be a net capital loss for the year. No problem! That net capital loss can be used to shelter up to $3,000 of 2018 ordinary income from salaries, bonuses, self-employment income, interest income, royalties, etc ($1,500 if you use married filing separate status). Any excess net capital loss from this year is carried forward to next year and beyond.
Watch out for the AMT
The TCJA significantly reduced the odds that you will owe AMT for 2018 by significantly increasing the AMT exemption amounts and the income levels at which those exemptions are phased out. Even if you still owe AMT, you will probably owe considerably less than under prior law. Nevertheless, it's still critical to evaluate year-end tax planning strategies in light of the AMT rules.
Other Planning Ideas
Boost your federal income tax withholding if you expect to owe a lot to IRS. It can help avoid an underpayment penalty. You're off the hook from the fine if you prepay at least 90% of your 2018 tax bill or 100% of what you owed for 2017 (110% if your 2017 adjusted gross income was more than $150,000). The new tax law and revised IRS tax withholding tables provide even more incentive for you to check that income taxes withheld from paychecks, retirement distributions, pensions, etc., are accurate for your circumstances. If you need to prepay additional taxes for 2018, you can have more tax withheld from December paychecks or a year-end IRA distribution. Tax withheld at any point during the year is treated as if paid evenly during the year.
Check your health flexible spending arrangement. You must clean it out by Dec. 31 if your employer hasn't implemented either the 2%-month grace period or the $500 carryover rule. Otherwise, you will forfeit any money left in your account.
Take advantage of the full $15,000-per-donee gift tax exclusion this year. Making yearly gifts greater than the annual exclusion amount...$30,000 if married ...will trigger the requirement to file a gift tax return for the year. But no tax will be due unless you've already made more than $11,180,000 in gifts during your lifetime.
Year-end Planning Moves for Small Businesses
Establish a Tax-favored Retirement Plan
If your business doesn't already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you are employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $55,000.
Other small business retirement plan options include the 40l(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
The deadline for setting up a SEP-IRA for a sole proprietorship and making the initial deductible contribution for the 2018 tax year is 10/15/19 if you extend your 2018 return to that date. Other types of plans generally must be established by 12/31/18 if you want to make a deductible contribution for the 2018 tax year, but the deadline for the contribution itself is the extended due date of your 2018 return. However, a SIMPLE-IRA plan must be established October 1, 2018. Be aware that if your business has employees, you will have to make retirement plan contributions for eligible employees.
Contact us for more information on small business retirement plan alternatives.
Take Advantage of Liberalized Depreciation Tax Breaks
The TCJA included a number of very favorable changes to the depreciation tax rules, including 100% first-year bonus depreciation for qualifying assets and much more generous Section 179 deduction rules.
Don't Overlook Estate Planning
The unified federal estate and gift tax exemption for 2018 is a historically huge $11.18 million, or effectively $22.36 million for married couples. Even though these BIG exemptions may mean you are not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules.
Contact us if you think you could use an estate planning tune-up.
Time Business Income and Deductions for Tax Savings
If you conduct your business using a pass-through entity (sole proprietorship, S corporation, LLC, or partnership), your shares of the business's income and deductions are passed through to you and taxed at your personal rates. Assuming the current tax rules will still apply in 2019, next year's individual federal income tax rate brackets will be the same as this year's (with modest bumps for inflation). In that case, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. For charges made with a bank credit card, you can claim the deduction in the year that you charged the expense, even if you pay the bill in the next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2018 until 2019.
On the other hand, if you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year's lower rate instead of next year's higher rate. Contact us for more information on timing strategies.
Meals and Entertainment.
Unfortunately, entertainment expenses are no longer deductible. However, the IRS has clarified that 50% of business meals are deductible if food or beverages are purchased separately from entertainment (or stated separately on one or more bills, invoices, or receipts). If your accounting system lumps meals and entertainment together, take steps now to separate deductible meal expenses from nondeductible entertainment.
This letter only covers a few of the year-end tax planning that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.
Your trusted advisors,
Schuman Simon & Grodecki Ltd.
Certified Public Accountants