again, tax planning for the year ahead presents a number of
challenges, this year, primarily due to tax laws changes
brought about the passage of the Tax Cuts and Jobs Act of
These changes include the nearly
doubling of the standard deduction, elimination of personal
exemptions, and numerous itemized deductions reduced or
eliminated. Let's take a closer look.
General Tax Planning
General tax planning strategies for individuals this year
include postponing income and accelerating deductions, as well
as careful consideration of timing related investments,
charitable gifts, and retirement planning. For example,
taxpayers might consider using one or more of the following:
Selling any investments on which you have a gain or loss this
year. For more on this, see Investment Gains and Losses,
If you anticipate an increase in taxable income this year, in
2018, and are expecting a bonus at year-end, try to get it
before December 31. Keep in mind, however, that contractual
bonuses are different, in that they are typically not paid out
until the first quarter of the following year. Therefore, any
taxes owed on a contractual bonus would not be due until you
file your 2019 tax return in 2020. Don't hesitate to call the
office if you have any questions about this.
Prepaying deductible expenses this year using a credit card.
Examples of deductible expenses include charitable
contributions and medical expenses. This strategy works
because deductions may be taken based on when the expense was
charged on the credit card, not when the bill was paid.
Likewise with checks. For example, if you charge a medical
expense in December but pay the bill in January, assuming it's
an eligible medical expense, it can be taken as a deduction on
your 2018 tax return.
If your company grants stock options, then you may want to
exercise the option or sell stock acquired by exercise of an
option this year. Use this strategy if you think your tax
bracket will be higher in 2019. Generally, exercising this
option is a taxable event; sale of the stock is almost always
a taxable event.
If you're self-employed, send invoices or bills to clients or
customers this year to be paid in full by the end of December.
Caution: Keep an eye on
the estimated tax requirements.
Accelerating Income and
Accelerating income and deductions are two strategies that are
commonly used to help taxpayers minimize their tax liability.
Most taxpayers anticipate increased earnings from year to
year, whether itís from a job or investments, so this strategy
works well. On the flip side, however, if you anticipate a
lower income next year or know you will have significant
medical bills, you might want to consider deferring income and
expenses to the following year.
If you anticipate being in a higher tax bracket next year,
accelerating income into 2018 is a good idea, especially for
taxpayers whose earnings are close to threshold amounts
($200,000 for single filers and $250,000 for married filing
jointly) that make them liable for additional Medicare Tax or
Net Investment Income Tax (see below).
Caution: Taxpayers close
to threshold amounts for the Net Investment Income Tax
(3.8 percent of net investment income) should pay close
attention to "one-time" income spikes such as those
associated with Roth conversions, sale of a home or
other large assets that may be subject to tax.
Tip: If you know you have
a set amount of income coming in this year that is not
covered by withholding taxes, there is still time to
increase your withholding before year-end can avoid or
reduce any estimated tax penalty that might otherwise be
due. On the other hand, the penalty could be avoided by
covering the extra tax in your final estimated tax
payment and computing the penalty using the annualized
In cases where tax benefits are phased out over a certain
adjusted gross income (AGI) amount, a strategy of accelerating
income and deductions might allow you to claim larger
deductions, credits, and other tax breaks for 2018, depending
on your situation. Roth IRA contributions, conversions of
regular IRAs to Roth IRAs, child tax credits, higher education
tax credits, and deductions for student loan interest are
examples of these types of tax benefits.
Examples of what a taxpayer might do to accelerate deductions
Pay a state estimated tax installment in December instead of
at the January due date. However, make sure the payment is
based on a reasonable estimate of your state tax.
Pay your entire property tax bill, including installments due
in year 2019, by year-end. This does not apply to mortgage
Pay 2019 tuition in 2018 to take full advantage of the
American Opportunity Tax Credit, an above-the-line deduction
worth up to $2,500 per student to cover the cost of tuition,
fees and course materials paid during the taxable year. Forty
percent of the credit (up to $1,000) is refundable, which
means you can get it even if you owe no tax.
Try to bunch "threshold" expenses, such as medical expenses
and miscellaneous itemized deductions. For example, you might
pay medical bills and dues and subscriptions in whichever year
they would do you the most tax good. Threshold expenses are
deductible only to the extent they exceed a certain percentage
of adjusted gross income (AGI). For example, to deduct medical
and dental expenses these amounts must exceed 7.5 percent of
AGI. By bunching these expenses into one year, rather than
spreading them out over two years, you have a better chance of
exceeding the thresholds, thereby maximizing your deduction.
Note: The 7.5 percent
threshold is only in effect for tax years 2017 and 2018.
In 2019, it reverts to 10 percent AGI.
Health Care Law
If you haven't signed up for health insurance this year, do so
now and avoid or reduce any penalty you might be subject to.
Depending on your income, you may be able to claim the premium
tax credit that reduces your premium payment or reduces your
tax obligations, as long as you meet certain requirements. You
can choose to get the credit immediately or receive it as a
refund when you file your taxes next spring. Please contact
the office if you need assistance with this.
Additional Medicare Tax
Taxpayers whose income exceeds certain threshold amounts
($200,000 single filers and $250,000 married filing jointly)
are liable for an additional Medicare tax of 0.9 percent on
their tax returns, but may request that their employers
withhold additional income tax from their pay to be applied
against their tax liability when filing their 2018 tax return
High net worth individuals should consider contributing to
Roth IRAs and 401(k) because distributions are not subject to
the Medicare Tax.
If you're a taxpayer close to the threshold for the Medicare
Tax, it might make sense to switch Roth retirement
contributions to a traditional IRA plan, thereby avoiding the
3.8 percent Net Investment Income Tax (NIIT) as well (more
about the NIIT below).
Alternate Minimum Tax
The alternative minimum tax (AMT) applies to high-income
taxpayers that take advantage of deductions and credits to
reduce their taxable income. The AMT ensures that those
taxpayers pay at least a minimum amount of tax and was made
permanent under the American Taxpayer Relief Act (ATRA) of
Although the AMT remained under the TCJA exemption amounts
increased significantly. As such, the AMT is not expected to
affect as many taxpayers. Furthermore, the phaseout threshold
increases to $500,000 ($1 million for married filing jointly).
Both the exemption and threshold amounts are indexed for
Note: AMT exemption
amounts for 2018 are as follows:
- $70,300 for single and head of household filers,
- 109,400 for married people filing jointly and for qualifying
widows or widowers,
- $54,700 for married people filing separately.
Property, as well as money, can be donated to a charity. You
can generally take a deduction for the fair market value of
the property; however, for certain property, the deduction is
limited to your cost basis. While you can also donate your
services to charity, you may not deduct the value of these
services. You may also be able to deduct charity-related
travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of your charitable
contributions--including travel expenses such as mileage--is
required in order to qualify for a deduction. A donor may not
claim a deduction for any contribution of cash, a check or
other monetary gift unless the donor maintains a record of the
contribution in the form of either a bank record (such as a
canceled check) or written communication from the charity
(such as a receipt or a letter) showing the name of the
charity, the date of the contribution, and the amount of the
Tip: Contributions of
appreciated property (i.e. stock) provide an additional
benefit because you avoid paying capital gains on any
Taxpayers age 70 Ĺ or older can reduce income tax owed on
required minimum distributions (RMDs) from IRA accounts by
donating them to a charitable organization(s) instead.
Investment Gains and Losses
This year, and in the coming
years, investment decisions are often more about managing
capital gains than about minimizing taxes per se. For example,
taxpayers below threshold amounts in 2018 might want to take
gains; whereas taxpayers above threshold amounts might want to
Caution: Fluctuations in
the stock market are commonplace; don't assume that a
down market means investment losses as your cost basis
may be low if you've held the stock for a long time.
Minimize taxes on investments by judicious matching of gains
and losses. Where appropriate, try to avoid short-term capital
gains, which are taxed at a much higher tax rate (i.e., the
rate is the same as your tax bracket) than long-term capital
In 2018 tax rates on capital gains and dividends remain the
same as 2017 rates (0%, 15%, and a top rate of 20%); however,
due to tax reform, threshold amounts do not correspond to the
new tax bracket structure as in prior years:
For taxpayers in the lower tax brackets (10 and 12 percent),
the rate remains 0 percent; however, the threshold amounts are
$38,600 for individuals and $77,200 for married filing
For taxpayers in the four middle tax brackets, 22, 24, 32, and
35 percent, the rate is 15 percent.
For an individual taxpayer in the highest tax bracket, 37
percent, whose income is at or above $425,800 ($479,000
married filing jointly), the rate for both capital gains and
dividends is capped at 20 percent.
Where feasible, reduce all capital gains and generate
short-term capital losses up to $3,000. As a general rule, if
you have a large capital gain this year, consider selling an
investment on which you have an accumulated loss. Capital
losses up to the amount of your capital gains plus $3,000 per
year ($1,500 if married filing separately) can be claimed as a
deduction against income.
Wash Sale Rule. After selling a securities investment to
generate a capital loss, you can repurchase it after 30 days.
This is known as the "Wash Rule Sale." If you buy it back
within 30 days, the loss will be disallowed. Or you can
immediately repurchase a similar (but not the same)
investment, e.g., and ETF or another mutual fund with the same
objectives as the one you sold.
Tip: If you have losses,
you might consider selling securities at a gain and then
immediately repurchasing them, since the 30-day rule
does not apply to gains. That way, your gain will be
tax-free; your original investment is restored, and you
have a higher cost basis for your new investment (i.e.,
any future gain will be lower).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, which went into effect in 2013,
is a 3.8 percent tax that is applied to investment income such
as long-term capital gains for earners above certain threshold
amounts ($200,000 for single filers and $250,000 for married
taxpayers filing jointly). Short-term capital gains are
subject to ordinary income tax rates as well as the 3.8
percent NIIT. This information is something to think about as
you plan your long-term investments. Business income is not
considered subject to the NIIT provided the individual
business owner materially participates in the business.
Please call if you need assistance with any of your long-term
tax planning goals.
Mutual Fund Investments
Before investing in a mutual fund, ask whether a dividend is
paid at the end of the year or whether a dividend will be paid
early in the next year but be deemed paid this year. The
year-end dividend could make a substantial difference in the
tax you pay.
* Example: You invest $20,000 in a mutual fund in 2018.
You opt for automatic reinvestment of dividends, and in late
December of 2018, the fund pays a $1,000 dividend on the
shares you bought. The $1,000 is automatically reinvested.
* Result: You must pay tax on the $1,000 dividend. You
will have to take funds from another source to pay that tax
because of the automatic reinvestment feature. The mutual
fund's long-term capital gains pass through to you as capital
gains dividends taxed at long-term rates, however long or
short your holding period.
* The mutual fund's distributions to you of dividends it
receives generally qualify for the same tax relief as
long-term capital gains. If the mutual fund passes through its
short-term capital gains, these will be reported to you as
"ordinary dividends" that don't qualify for relief.
Depending on your financial circumstances, it may or may not
be a good idea to buy shares right before the fund goes
ex-dividend. For instance, the distribution could be
relatively small, with only minor tax consequences. Or the
market could be moving up, with share prices expected to be
higher after the ex-dividend date. To find out a fund's
ex-dividend date, call the fund directly.
Please call if you'd like more information on how dividends
paid out by mutual funds affect your taxes this year and next.
Year-End Giving To Reduce Your
Potential Estate Tax
The federal gift and estate tax exemption is currently set at
$11.18 million but is projected to increase to $11.4 million
in 2019. ATRA set the maximum estate tax rate set at 40
Gift Tax. Sound estate planning often begins with
lifetime gifts to family members. In other words, gifts that
reduce the donor's assets subject to future estate tax. Such
gifts are often made at year-end, during the holiday season,
in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up
to $15,000 a year per donee in 2018 and are expected to remain
the same in 2019.
Caution: An unused annual
exemption doesn't carry over to later years. To make use
of the exemption for 2018, you must make your gift by
Husband-wife joint gifts to any third person are exempt from
gift tax for amounts up to $30,000 ($15,000 each). Though
what's given may come from either you or your spouse or both
of you, both of you must consent to such "split gifts."
Gifts of "future interests," assets that the donee can only
enjoy at some future time such as certain gifts in trust,
generally don't qualify for exemption; however, gifts for the
benefit of a minor child can be made to qualify.
Tip: If you're
considering adopting a plan of lifetime giving to reduce
future estate tax, don't hesitate to call the office for
Cash or publicly traded securities raise the fewest problems.
You may choose to give property you expect to increase
substantially in value later. Shifting future appreciation to
your heirs keeps that value out of your estate. But this can
trigger IRS questions about the gift's true value when given.
You may choose to give property that has already appreciated.
The idea here is that the donee, not you, will realize and pay
income tax on future earnings and built-in gain on sale.
Gift tax returns for 2018 are due the same date as your income
tax return (April 15, 2019). Returns are required for gifts
over $15,000 (including husband-wife split gifts totaling more
than $15,000) and gifts of future interests. Though you are
not required to file if your gifts do not exceed $15,000, you
might consider filing anyway as a tactical move to block a
future IRS challenge about gifts not "adequately disclosed."
Please call the office if you're considering making a gift of
property whose value isn't unquestionably less than $15,000.
New Tax Rate Structure for the
Income earned on investments you give to children or other
family members are generally taxed to them, not to you. In
prior years, amounts exceeding $1,050 were taxed at the
parent's marginal tax rate if that rate was higher than the
child's rate. Under the TCJA, however, the kiddie tax rules
have changed. For tax years 2018 through 2025, unearned income
exceeding $1,050 is taxed at the rates paid by trusts and
estates. For ordinary income (amounts over $12,501), the
maximum rate is 37 percent. For long-term capital gains and
qualified dividends (amounts over $12,501), the maximum rate
is 20 percent.
Other Year-End Moves
Retirement Plan Contributions. If you own an
incorporated or unincorporated business, consider setting up a
retirement plan if you don't already have one. It doesn't
actually need to be funded until you pay your taxes, but
allowable contributions will be deductible on this year's
If you are an employee and your employer has a 401(k),
contribute the maximum amount ($18,500 for 2018), plus an
additional catch-up contribution of $6,000 if age 50 or over,
assuming the plan allows this and income restrictions don't
If you are employed or self-employed with no retirement plan,
you can make a deductible contribution of up to $5,500 a year
to a traditional IRA (deduction is sometimes allowed even if
you have a plan). Further, there is also an additional
catch-up contribution of $1,000 if age 50 or over.
Savings Accounts. Consider setting up a health
savings account (HSA). You can deduct contributions to the
account, investment earnings are tax-deferred until withdrawn,
and amounts you withdraw are tax-free when used to pay medical
In effect, medical expenses paid from the account are
deductible from the first dollar (unlike the usual rule
limiting such deductions to the amount of excess over 7.5
percent of AGI). For amounts withdrawn at age 65 or later that
are not used for medical bills, the HSA functions much like an
To be eligible, you must have a high-deductible health plan (HDHP),
and only such insurance, subject to numerous exceptions, and
must not be enrolled in Medicare. For 2018, to qualify for the
HSA, your minimum deductible in your HDHP must be at least
$1,350 for single coverage or $2,700 for a family.
Education Plans. Maximize contributions to 529
plans, which starting in 2018, can be used for elementary and
secondary school tuition as well as college or vocational
These are just a few of the steps you might take. Please
contact the office for assistance with implementing these and
other year-end planning strategies that might be suitable for
your particular situation.
Don't hesitate to call us if you need help or
want to get started on tax planning for the rest of 2018 (or a jump
start on 2019)!
If you have comments or questions on the information in these
articles, as usual feel free to call our offices.
Thanks! Julie Jeffers
Feel free to give us a call if
you have a question about these topics or issues or if you
need help or want to
get started on tax planning for the rest of 2018! If you have comments on the information in these
articles, feel free to call our offices.