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Year-End Tax Planning for Individuals in 2018: What to Plan For

11.29.2018

Year-end tax planning for 2018 will look much different this year, thanks to the Tax Cuts and Jobs Act, which made significant changes to the tax rules for both individuals and businesses. For individuals, there are new, lower income tax rates, an increased standard deduction, severely limited itemized deductions and no personal exemptions, increased child tax credit and a watered down alternative minimum tax (AMT), among other changes.

Below is a list of planning tips that may help individuals year-end tax savings. Not all actions will apply in every taxpayer’s situation, but individuals will likely benefit from many of them.

Tax Planning Moves for Individuals

Long-term capital gain from sales of assets held for over one year is taxed at 0 percent, 15 percent or 20 percent, depending on the taxpayer’s taxable income. The 0 percent rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple). If the 0 percent rate applies to long-term capital gains you took earlier this year — for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2018 is $70,000 — then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won’t yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0 percent rate.

Postpone income 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 is also desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Additionally, it may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.

Itemized Deductions

Beginning in 2018, many taxpayers who claimed itemized deductions year after year will no longer be able to do so. That’s because the basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately) and many itemized deductions have been cut back or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees) and unreimbursed employee expenses are no longer deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10 percent-of-AGI limits are met. You can still itemize medical expenses to the extent they exceed 7.5 percent of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won’t save taxes if they don’t cumulatively exceed the new, higher standard deduction. However, some taxpayers may be able to work around this by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2018 deductions even if you don’t pay your credit card bill until after the end of the year.

Estate Planning

If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2018, and possibly reduce tax breaks geared to AGI (or modified AGI).

If you are age 70½ or older by the end of 2018, have traditional IRAs, and particularly if you can’t itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2018 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2018. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2018, but the withheld tax will be applied pro rata over the full 2018 tax year to reduce previous underpayments of estimated tax.

Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. If you become eligible in December of 2018 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2018.

Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. 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.

To discuss advanced strategies for year-end tax planning, please contact Debbie Vandeven, Tax Principal at 314.983.1386 or dvandeven@bswllc.com

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