This time last year Congress and President Trump were knee deep in tax reform talk that resulted in the Tax Cut and Jobs Act (TCJA) of 2017. We have covered many of the TCJA provisions that became effective this year in previous blog posts and newsletter articles. As 2018 comes to a close, let’s review some of the new provisions and related year-end tax planning strategies that may help reduce your tax burden.
- If you have realized capital gains and unrealized capital losses in your investment account, sell appropriate investments to realize the losses. The goal would be to offset the capital gains (and capital gain distributions) with losses plus $3,000 to offset ordinary income.
- Since there is now a $10,000 limit on the deduction one can take on the sum of state income taxes and property taxes, you have probably already met the limit and there is no need to make any further payments before year-end. If you itemize, make sure you meet the $10,000 limit. Note that this limitation does not apply to business or rental real estate taxes.
- Review your mortgage debt and consider the limitations on interest deductions. Home equity interest is no longer deductible unless the debt can be traced to business or investment activities. New (2018) qualified home mortgage debt is limited to $750,000. Pre-2018 qualified home mortgage debt is grandfathered under the old $1 million limit. Be prepared to lose interest deductions if you are over these limits.
- If your itemized deductions will exceed the standard deduction of $12,000 for single and $24,000 for joint filers, consider paying charitable contributions before year-end. You may even want to consider prepaying 2019 commitments in 2018. Some clients are considering prepaying additional charitable commitments to donor advised funds or private foundations. Making donations with appreciated stock or property instead of cash is a good way to get the full value of the contribution and avoid the capital gains on the appreciation.
- If you itemize, medical expenses are deductible in 2018 to the extent they exceed 7.5% of adjusted gross income. This threshold goes up to 10% in 2019. Accelerating medical expenses into 2018 may therefore benefit you depending on your income level.
- For those employees who have relied heavily on itemized deductions for unreimbursed business expenses, consider restructuring your arrangement with your employer to get qualified expenses reimbursed instead. Unreimbursed employee expenses are no longer deductible by the employee whereas qualified reimbursed expenses could be tax-free to the employee and deductible by the employer.
- Cash basis businesses should defer income into 2019 and accelerate deductions into 2018, assuming your effective tax rates will be the same or lower in 2019. Similarly, accrual basis businesses should consider whether delaying year-end invoicing to customers and accelerating the receipt of vendor invoices will reduce its effective tax rate between 2018 and 2019.
- Accrual basis businesses should consider whether to switch to the cash basis method of accounting. Under the new law, businesses with average gross receipts of $25 million or less, even if they have inventories, are allowed to use the cash basis. The election is made when you file your 2018 tax return.
- Review fixed asset needs for your business and consider year-end purchases to benefit from the 100% bonus depreciation or the enhanced Section 179 deductions.
- Review inventories and write-off/dispose of obsolete items before year-end to accelerate tax deductions.
- Review your recordkeeping for meals and entertainment with the understanding that only half of the business meals are deductible while none of the entertainment is deductible (generally).
- Maximize retirement plan contributions/accruals to optimize the 2018 deductions.
- For those unfortunate ones who have had a low-income year in 2018, consider whether converting traditional IRAs into Roth IRAs before year-end makes sense. The conversion would be taxable, but perhaps the low/zero tax rate would make it beneficial in the long run.
- Businesses should evaluate whether their operating structure (C Corporation, partnership, S Corporation etc.) is still appropriate and make changes if necessary. Generally, the same decision factors as used in the past will apply in choosing what entity to use.
- Pass-through businesses such as S Corporations, LLCs and partnerships should get prepared for the new 20-percent qualified business income deduction under Section 199A. Tax preparers will be asking for more information this year than ever before to make the necessary calculations and to make the necessary decisions on what is eligible for this new benefit. Consider whether bifurcating business activities and reporting will be beneficial given that certain service-related activities might not qualify, while others will.
- Eligible employers with a paid family leave policy can get a credit as high as 25% of amounts paid to eligible employees in limited circumstances. A written policy must be in place by December 31, 2018 to be retroactively effective for all of 2018.
- If you have very large capital gains, consider whether to reinvest the gains into a new “opportunity zone fund” to defer the gains. Bear in mind that these funds are quite new with challenging guidelines and associated risks, the details of which are beyond the scope of this article.
- For 2018, you can make gifts of up to $15,000 to any recipient without any gift tax reporting necessary. The $15,000 limit is expected to stay the same for 2019. If you gift beyond this, be aware that the lifetime exclusion from paying gift taxes is currently $11,180,000. Given this large exclusion, now may be a good time to revisit and possibly update your Will.
As you can see, many familiar tax rates, rules and provisions have changed in 2018 and their impact will be felt in 2019 and beyond. A bullet-list is no substitute for a comprehensive tax strategy tailored to your situation and goals, but it is a good place to start when preparing for a year-end conversation with your tax advisor.
Strategic tax planning generally requires one to look at not only the current year tax posture, but also the potential tax posture for next year and beyond to the extent possible. The recent changes in Congress, with an expanded Republican majority in the Senate and a new Democratic majority in the House, will make it impossible to predict all future tax changes. That said, we do not expect any significant changes from 2018 to 2019 in tax rates and most tax provisions.
The international, federal and state tax experts at Williams Benator & Libby encourage you to contact us or your own tax advisor to review your current tax strategy and ensure that you’re ready to comply with and benefit from the many changes to United States’ tax policy.