In our first part, we discussed the impact of the new law on personal taxes, and in our second part, we discussed planning for small businesses. In this part, we give you a guide for year-end moves to reduce total taxes between 2018 and 2019. Can you act at all? Review the changes in itemized deductions
Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the new $24,000 standard deduction for married couples, $12,000 for single taxpayers, means you will not itemize (i.e., your total for itemized deductions is less than the standard amount). If you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (you can also stop collecting receipts for those deductions!).
Some possible deduction strategies
One technique for getting around the limit is to bunch deductions from two or more years into one year. The only deduction that you can really move is charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full amount in one year, then donate to a donor advised fund from which you may be able to designate donations to particular charities in future years.
If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS- approved charity, and having none of the distribution taxed.
The deduction of unreimbursed business expenses was terminated by the new tax law. One possible strategy is to form an LLC or S Corp., report the business expenses on form 1065 or 1120S, and then take those on Schedule E to offset other income. You will need a valid business purpose to form the LLC or S Corp. and take expenses.
You may also be able to report business expenses on Schedule C as relating to self-employment. Again, you must have a valid business purpose. Also, the IRS could apply the hobby loss rule to disallow the deductions, if you do not show a profit for the business in two out of five years. Thus, it is best to consult with an attorney before trying any of these ideas.
The tax planning steps
If you are able to itemize, determine what income and deductions you can move from 2018 to 2019 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions. And review our post on planning under 199A for QBID.
Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
Finally, watch for the Alternative Minimum Tax (“AMT”):
- The exemption for the AMT and the threshold above which that exemption gets phased out both rise for 2018, so fewer taxpayers will owe the AMT.
Review your unrealized losses to see if you can shelter gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income. If you sell an asset that would prefer to retain, in order to realize gains in 2018, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait or buy a similar asset that fits your asset allocation while not counting as a wash sale).
If you have net gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation.
- One note of caution: many mutual funds will make capital gains distributions to shareholders in December. Shareholders may be surprised on the amount of taxable gain, even for funds that had little net appreciation.
More on itemized deductions
Mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary residence. Interest on home equity loans will not be deductible, except when the home equity indebtedness is used to purchase or improve your primary residence.
As you may recall, all miscellaneous deductions were eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee business expenses. And moving expenses are no longer allowed (except for military personnel in certain cases).
Under the new law, medical expenses are subject to a 7.5% threshold before becoming deductible.
More year-end planning
While you review your taxes, consider reviewing your estate plan and beneficiary designations. The federal exemption doubled to just over $11 million in 2018, so fewer people will owe any federal estate tax. However, many states still impose estate taxes on smaller estates. If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person.
If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.
If you have not maxed-out your 401(k) plan, IRA,Health Savings Account or flex plan account, consider doing so before the end of the year.
Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2018 and 2019.