Over 100 new tax provisions. That’s what the Tax Cuts and Jobs Act (TCJA) has created.
Everyone has tax reform on their mind now that 2018 is coming to a close. What year-end planning steps can you take to ensure you are well positioned? Some of the new provisions and surviving provisions have created opportunities for individuals. Interestingly, the original “TCJA” had sunset provisions and parts of the bill to attempt a revenue neutral effect. With the Protecting Family and Small Business Tax Cuts Act of 2018 passing the House, some of the sunset provisions could be made permanent which may have different long-term effects. These may potentially lead to future tax bills that will add to the complexity.
With the unknown climate in Washington politics, state tax authorities are aggressively looking at revenue sources and the need for regulations to provide clarity on key provisions of the tax bill. Taxpayers should look to their advisors to run multiple tax projections for multiple tax years to map out tax strategies related to life decisions, such as liquidity events in their business, tax planning for their investments, and estate and gift planning.
Choose the right approach to deductions
Many taxpayers who have traditionally itemized their deductions will probably continue to itemize, but at a lower amount than in the past due to a change in the deduction mix for Schedule A. The fixed $10,000 deduction for state and local taxes will move many taxpayers toward the newly increased standard deduction amounts of $12,000 for single filers and $24,000 for married couples.
The choice between taking the standard deduction or itemizing will depend on your individual circumstances. With planning, itemized deductions in one year can be increased to help offset planned tax gains leaving the standard deduction as a fall back to be taken in other years.
Time medical expenses
The TCJA gives taxpayers with substantial upcoming medical expenses strong incentive to incur them this year. The law lowered the threshold for deducting unreimbursed medical expenses from 10% of adjusted gross income (AGI) to 7.5% for all taxpayers in 2017 and 2018. For 2019, however, the threshold returns to 10%, making it harder to qualify for the deduction.
Qualified medical expenses are broadly defined as the costs of diagnosis, cure, mitigation, treatment or prevention of disease and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists and other medical practitioners, as well as equipment (including glasses, contacts and hearing aids), supplies, diagnostic devices and prescription drugs. Travel expenses related to medical care are also deductible. For loved ones in a nursing care facility, there is a large element of medical care eligible for this deduction.
Bunch charitable contributions
You can claim deductions for charitable contributions only if you itemize the deductions. For that reason, it’s been estimated that the number of households claiming charitable deductions will decline under the new tax law. But those with philanthropic inclinations can reap tax benefits by donating strategically.
For example, if you contribute to a donor-advised fund (DAF), you can get an immediate tax deduction. By making multiple contributions to a DAF in a single year, you can get past the standard deduction threshold and take an itemized deduction. You can direct the fund administrator to distribute the funds annually in equal increments, so your favorite charities receive a steady stream of donations regardless of whether you itemize every year.
Contributing appreciated assets to a DAF (or directly to a charity) can help avoid long-term capital gains taxes (subject to certain limitations) in addition to securing a deduction for the assets’ fair market value.
If you are not using a DAF, you can take a similar “bunching” approach to your donations to accumulate enough charitable itemized deductions to get over the standard deduction hurdle. For example, if you typically contribute to a nonprofit at the end of the year, you can instead bunch donations in alternative years (January and December of 2019, and January and December of 2021). Or you can make several years’ worth of donations in one year. You give the same aggregate amounts as in the past and preserve the charitable deduction.
Other traditional year-end tax planning is still worth reviewing as each tax year draws to a close. Below are some more common ideas to keep in mind to manage your tax situation.
Deduction acceleration has the same goal as charitable contribution bunching: boosting the amount of deductions over the standard deduction to make itemizing worthwhile and increase the total write-off.
However, if you are in danger of falling prey to the alternative minimum tax (AMT), think twice before pursuing this strategy. Certain deductions allowed for the regular income tax — including those for state and local taxes — are not allowed for AMT purposes.
Contribute to retirement accounts
As in previous years, you can shrink your taxes by adding to tax-deferred retirement accounts. Consider the benefit of making allowable contributions to your IRAs and 401(k) plans. Also, keep in mind that because the deadline for certain retirement account contributions is after the end of the year, there may be an opportunity for tax planning into the new year. Keep in mind, you can also make charitable contributions from your IRA to take advantage of mandatory withdrawals.
Offset capital gains and losses
The strategy of “loss harvesting” in conjunction with your overall investment strategy to shield gains from the capital gains tax remains advisable for 2018, particularly for high-income taxpayers. It involves selling underperforming investments to realize losses that can offset taxable gains realized during the year. As a bonus, if the losses exceed gains, up to $3,000 of the excess losses generally can be used to offset ordinary income, which is taxed at a higher rate than capital gains. Any excess beyond that is carried forward.
You might also consider selling depreciated assets and contributing the proceeds to charity. The loss can be harvested (assuming the asset has been held for more than one year). plus, you’ll receive a charitable contribution deduction for the cash donation.
Gain harvesting can be implemented if you have a capital loss from an investment and you have unrealized gains within your investment portfolio to recognize and offset that loss.
Employees have limited options for deferring wages and salaries. If you’re self-employed, you can push income into 2019 by, for example, delaying invoices until late December so payment doesn’t arrive until January.
Regardless of your employment situation, you can also defer income by taking capital gains next year. A caveat, though — deferring income is wise only if you expect to be in the same or a lower tax bracket in 2019. If not, the taxes will be greater next year than this year.
There’s still time
There’s much more to consider under the new tax law than what has been included above, but one thing is certain: It’s not too late to take advantage of year-end tax planning opportunities. Our experts at DGC can help you determine the right strategies for your situation.
For more information about this or any other tax reform issues, please contact your DGC engagement team or Erica Nadeau, CPA, MST at 781-937-5311 / firstname.lastname@example.org or Scott Treacy, CPA at 781-937-5393 / email@example.com.