The Tax Cut and Jobs Act brought the most significant changes to our income taxes in the last thirty years. We continue to assess its impact in this post, which provides updates and some strategies for items discussed at the end of 2018 in these three posts:
As a quick summary of the posts, in the first post, we discussed the impact of the new law on personal taxes; in the second post, we discussed planning for small businesses; and in our third post, we provided a practical guide for year-end action.
Itemized deduction strategies
As we noted in these tax planning posts, far fewer US Taxpayers will itemize because of the increased $24,000 standard deduction for married couples ($12,000 for individuals). One estimate is that the number will be about 6% of all taxpayers for 2018, down from over 30% in prior years.
Bunching your itemized deductions into a single year is one way to push your total above the standard deduction amount, and thus restore the tax deduction benefit for such items as charitable donations. We discussed bunching and giving to donor advised funds in our third post. As we noted then, charitable donations are the easiest Schedule A items to which to apply bunching.
Miscellaneous deductions are gone;
Or are they?
Now that the miscellaneous itemized deductions are gone, can you do anything with tax prep and investment fees?
Take tax prep fees on other schedules
For the tax preparation fees, you can deduct those amounts on Schedule C, Schedule E (page 1), or Schedule F. And, if you have K-1s, input the fees as unreimbursed expenses so that the fees flow to Schedule E (page 2).
Capitalize investment fees
As for investment fees, there is support for capitalizing these costs, but the support is not dispositive. This interpretation of the Treasury regulations is that you can capitalize the cost of evaluating the value of stocks purchased and sold. You would need to elect to capitalize the related fee for each transaction, so this could be a great deal of work, depending on the amount of fees and number of stocks purchased or sold in a given year. Taking this approach seems fair, as the treatment parallels treatment of fees in mutual fund, where the advisory fees are netted out before capital gain and dividend distributions to shareholders.
Notes: First, that there is a Treasury memorandum that says you cannot add carrying costs to basis. Second, even if you could, capitalizing takes a great deal of work so it may not be worth the effort.
The first $1,050 of unearned income for children who are dependents is not taxed in 2018. Amounts above that level are taxed at the same rate as trusts and estates. Those brackets are quite compressed compared to individual brackets. Nonetheless, a child of a parent in the 37% tax bracket can still have $12,500 of income taxed at a lower rate. That could save taxes on college funds (but compare to sheltering in a 529 plan).
Child tax credit
The $2,000 child credit phases out at much higher adjusted income levels for 2018: over $400,000 for married couples, $200,000 for single taxpayers. If your child is age 17 or over, you lose the $2,000 credit, but you may qualify for the $500 dependent credit. This credit could not only applies to college students, it covers disabled children, elderly parents and other family that are your dependents.
QBID for rental real estate
The IRS regulations provide a safe harbor for people who spend 250 or more hours a year on activities related to their rental properties. You will need to keep records of your time and maintain separate bank accounts for the activities.
Enterprise Zone rollovers
You can roll over gain from stock or other capital assets to investments in an enterprise zone, delaying tax on the gain, and even eliminating tax on a portion. We will post more on this at a future date.
With the doubling of the federal gift and estate tax credit, few estates will be subject to federal estate tax. This means that gifting is not nearly as important as retaining low basis assets for the step at death. By this we mean that keeping assets in your name results in those assets are treated as having basis equal to the fair market value at death, so your heirs only pay tax on any gain that occurs after your death.
There have been many changes to our tax law, so if you are not sure how you are affected, contact me for some planning. Maybe we can help you save on taxes!