There’s still Time to Improve your Tax Position for 2018 by Jeffrey M. Mutnik, CPA/PFS
Posted on November 26, 2018 by Jeffrey Mutnik
The passage of tax reform at the end of 2017 leaves many individuals in a better tax position than they were one year ago. Nevertheless, understanding how to maximize the potential tax-savings opportunities contained is the provisions of the new law is not a simple endeavor. To help avoid an unwelcome tax liability in April of 2019, taxpayers should take the time now to implement some tried-and-true year-end strategies as well as some new planning tips around the changes brought about by the Tax Cuts and Jobs Act (TCJA).
Check your Withholding and Estimated Tax Payments
The new withholding tables combined with expanded tax brackets and the elimination of certain deductions means that you may not have been paying your fair share of taxes on income earned during the year through quarterly estimated tax payments and/or the amount employers withhold from paychecks. If you haven’t done so already, contact your tax advisors to do a withholding checkup and project an estimate of your tax liability for 2018. To avoid a potential penalty for tax underpayments, you may request your employer increase the withholding on your last paychecks for 2018 or your year-end bonus. Alternatively, you can make a fourth-quarter estimated-tax payment to the IRS before Jan. 15, 2019, but doing so will be subject you to a penalty for failing to pay taxes as-you-go during 2018.
A withholding checkup is equally important for retirees to ensure that the government withholds enough taxes from Social Security, and they are prepared to pay the tax liabilities on the distributions they receive from retirement accounts, including 401(k)s and traditional IRAs. It may make sense to withhold income tax on retirement account withdrawals. Such withholding can also be used to reduce or avoid a penalty for not paying enough estimated tax that was due earlier in the year. If the distribution is not otherwise required or needed, it can be rolled over into another retirement account within 60 days to avoid any additional, unwanted tax exposure, including funds to replace the amount of withholding.
Will you be Able to Itemize or will you take the Standard Deduction?
It is expected that far more taxpayers will claim the higher standard deduction in 2018 due to the elimination and/or limitation of many of the tax breaks that they previously itemized on their returns, including a $10,000 cap on property, state and local taxes, restrictions to the deduction for mortgage interest on new loans executed after Dec. 31, 2017, and the elimination of deductions for miscellaneous expenses, such as tax preparation and other professional service fees. However, high-net-worth taxpayers may still have an opportunity to maximize their itemized deductions before the end of the year by accelerating their charitable contributions into 2018 or making more visits to the doctor and scheduling last-minute procedures on order to exceed the standard deduction threshold of $12,000 for single taxpayers or $24,000 for those married filing jointly. Also, consideration should be given to bunching your charitable deductions in January and December of the same year to maximize the use of the standard and itemized deductions over a multi-year period.
Max Out Retirement Plan Contributions, Remember RMDs
One of the few deductions that survived tax reform are the contributions that taxpayers make to their retirement-saving plans. For 2018, you can contribute as much as $5,500 to a traditional IRA ($6,500 if you are age 50 or older) or $18,500 to a 401(k) plan ($24,500 if you are age 50 or older) and reduce your taxable income by that amount. If you are an employee, you have until Dec. 31, 2018, to increase your 2018 401(k) contribution through salary deferral. If you are a business owner, you have until April 15, 2019, to make a pre-tax contribution to your solo 401(k) and apply it to your 2018 tax return. The deadline for making contributions to IRAs, including ROTH IRAs, is April 15, 2019.
If you are 70 ½ years of age or older and you did not work in 2018, you must take a taxable required minimum distribution (RMD) from your 401(k) and/or IRA by Dec. 31, 2018. If you fail to take the RMD, you or risk a penalty of 50 percent of the undistributed amount. If you are still working, you may postpone the RMD until the year in which you actually retire. If you turned 70 ½ years old this year, you have a one-time option to defer your initial RMD until April 1, 2019. While this will allow you to effectively defer 2018 taxable income into next year, it will also require that you take two RMDs in 2019 and essential double your income for that year.
Make use of FSA Funds
Check on the balance in your flexible spending account (FSA) because you will lose any remaining funds that you do not use by the end of the year. If you have money left in your FSA, schedule doctors’ appointments, visit the dentist, refill subscriptions or buy new glasses before Dec. 31.
Harvest Capital Losses
To minimize your exposure to capital gains taxes, you should consider selling underperforming investments before the end of the year to generate a tax loss that can reduce your taxable income. Tax losses can be used to offset gains of matching holding periods (e.g. short-term losses can offset short-term gains and long-term losses to offset long-term gains) and allow investors to maximize the use of their personal tax attributes. However, investors should be careful to avoid the wash-sale rules that could disallow the use of a realized loss, as well as consider whether or not the sale of an asset makes sense in relation to their existing investment strategy. Disposing of an asset solely for a tax benefit may disrupt and derail your long-term financial goals.
Along the same lines, taxpayers who sold cryptocurrency, such as bitcoin, in 2018 should be prepared to pay taxes on any gains resulting from those transactions.
Defer Capital Gains
The tax code offers a few opportunities for taxpayers to defer or even eliminate capital gains from the sale of certain assets. For example, investors can defer taxes on the sale of real estate by completing a 1031 exchange and reinvesting those gains in similar like-kind real property. In addition, the new tax law’s Opportunity Zone program allows taxpayers to defer or even eliminate capital gains tax when they reinvest the proceeds from an asset sale into a business or property located in any of the nation’s more than 8,000 opportunity zones.
Give Gifts to Charity and Family
By making gifts of money or property, either to charities, family members or friends, you may be able to reduce the amount of your income that is subject to tax. For example, donations to qualified charitable organizations are fully deductible (up to certain income thresholds) against both income taxes and the alternative minimum tax (AMT), as long as you mail or charge the donation to your credit card before Dec. 31, 2018. Furthermore, you may donate up to $100,000 of your 2018 RMD directly to a charity by December 31 to avoid including that amount in your taxable income.
In addition, you may have an opportunity to reduce your future taxable income and protect your assets from exposure to estate and gift taxes if you give gifts of $15,000 or less to as many people as you wish before Dec. 31, 2018. For married couples, the maximum amount that may be excluded from taxes in 2018 is $30,000. It is important to remember that there is no annual limit on the amount you may gift tax-free to your spouse unless he or she is not a U.S. citizen. Similarly, you may pay as much as you like directly to an educational or medical institution to cover the costs of tuition or medical expenses for another person without gift tax implications. Gifts above the statutory threshold will require you to file a gift tax return, but they will not cause taxation until you have exhausted the enhanced individual lifetime exclusion of $11.18 million, $22.36 million for married couples.
Look for Opportunities to Minimize Business Tax Liabilities
The TCJA reduced the corporate tax rate to 21 percent and introduced a potential deduction for qualifying pass-through business entities. To be eligible for the full benefit of the 20 percent pass-through deduction, businesses should assess their lines of business, the ways in which they pay wages to workers and whether they own or lease the property they use to generate business or trade income. In addition, business owners may consider purchasing expensive equipment before the end of the year in order to claim a full deduction for those costs in 2018 and/or make improvements to nonresidential property to qualify for an additional deduction of up to $1 million.
Protect your Assets
The entity you select to hold your personal and business assets will have far-reaching effects on your exposure to income, estate and gift taxes; privacy; protection from creditors; and control over distributions of assets. The end of the year is a good time to meet with professional advisors to review the assets holding structures you currently have in place and make adjustments, as needed, to align with changing life circumstances.
The advisors and accountants with Berkowitz Pollack Brant and its affiliate Provenance Wealth Advisors work with U.S. and foreign citizens and businesses to develop tax-efficient solutions that meet regulatory compliance and evolving financial needs.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at firstname.lastname@example.org.