2018 Year-End Tax Planning for Individuals
Year-end 2018 sees the end of the first year of the Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the Unites States in more than 30 years. While one of the claimed benefits of tax reform was the simplification of filing and the lowering if income tax rates, there are still many steps that individuals can take that can lower their tax bills. Planning during the final weeks and months of this year involves much more –both in terms of traditional year-end strategies and strategies developed in response to developments that have taken place since last year. Here are some points to consider:
Data gathering. Year-end planning should start with data collection and a review of prior year returns. This includes information on losses or other carryovers, estimated tax installments, and items that were unusual. Conversations regarding next year should include discussions of any plans for significant purchases or dispositions, as well as any possible life cycle events.
Income tax rates. One of the most significant factors in tax planning for individuals is their tax bracket. The most direct control taxpayers have over their tax bracket rests in their ability to control the timing of income and deductible expenses. For example, taxpayers who expect to be in a lower tax bracket in 2019 should consider deferring income to 2019 and accelerating deductions into 2018. While tax brackets seem as though they will be relatively stable for the next few years, individual circumstances could mean a shift in brackets from year to year.
Investments. Taxpayers holding investments, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling toward the end of the year, as well as, exchanging appreciated assets for like-kind property in order to defer gains. Balancing tax considerations with other factors is part of the challenge in dealing with investments, including: the ordinary income tax rates, the net investment income tax rate, the capital gain rates, and the alternative minimum tax (AMT).
Income caps on benefits. Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in another year.
Life events. The biggest variables for many taxpayers impacting their year-end tax planning surrounds life events such as marriage, divorce, birth or adoption of a child, a new job or the loss of a job, and retirement. These life events may, for instance, result in a change in filing status that will affect tax liability. The possibility of significant changes and/or significant or unusual items of income or loss should also be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future and predict, if possible, any events that could trigger significant income, losses, or deductions.
2018 Tax Law Changes. Nearly all of the provisions of the TCJA became effective January 1, 2018. As such, for 2018 there are many new tax provisions that individuals should be aware of.
Alimony. One very significant change that comes into effect January 1, 2019, is the treatment of alimony. Beginning with divorces and separation agreements entered into after December 31, 2018, alimony or separate maintenance payments are no longer deductible by the payor, nor includible in the income of the payee. This change does not affect divorce or separation agreements entered into before 2019, nor those altered after 2018 where the changed method of taxation is not expressly stated to apply.
Medical expenses. The TCJA lowered the floor for claiming deductions for medical expenses to 7.5 percent of AGI for all taxpayers, not just those aged 65 or higher, applicable to 2017 and 2018 only.
State and local taxes. The TCJA limits the deduction for state and local taxes, which includes real property taxes, to $10,000 per year.
Elimination of personal exemptions. The TCJA has temporarily suspended the personal exemptions for a taxpayer, their spouse and any dependents.
Increased standard deduction. One of the most broadly impactful provisions of The TCJA was the near doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for heads of households, and $12,000 for all other individual filers. This increased amount makes it less likely that it is more advantageous for individuals to itemize deductions. Some taxpayers may be able to work around the new reality 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. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
Miscellaneous itemized deductions. TCJA eliminated miscellaneous itemized deductions for individuals. This includes deductions for unreimbursed employee expenses.
In addition to the changes impacting individuals above, The TCJA also resulted in numerous changes to the tax provisions applicable to businesses. As such, business owners also should be aware of the following changes:
Depreciation and expensing. TCJA made some significant changes to encourage businesses to expand and invest in new property. First-year depreciation allowances on certain business property, or bonus depreciation, has fluctuated over the last few years, but the TCJA provides for 100 percent bonus depreciation for property placed in service before 2023. Additionally, the limitation on expensing certain depreciable assets under Section 179 has been increased to $1 million, with a $2.5 million investment limitation. While 2018 is not necessarily the last time these benefits will be available, there currently is an opportunity to take advantage of the additional deductions. If business property or equipment will be purchased in early 2019, consider accelerating the purchase and placing the property or equipment in service before December 31, 2018.
Qualified business income deduction. Beginning in 2018, owners of certain businesses may be eligible to deduct up to 20 percent of the qualified business income (QBI) from sole proprietorships, partnerships, trusts and S corporations. Since this is a completely new deduction, the IRS continues to provide additional clarification on the requirements for the deduction as well as the documentation requirements, which may require a year-end review of records. There are still actions that can be taken with regard to the new provisions of the TCJA, many of which can still be completed before the end of the year.
Opportunity Zone Benefits. The TCJA also introduced an opportunity to defer the taxation of capital gains if the amount of the taxable gain is invested in a qualified opportunity zone property. This benefit applies to gains from the sale of investments as well as property providing a potential opportunity to sell appreciated investments or property in 2018 and deferring the tax on the gain until a later date.
Timing rules. Timing, and the skilled use of timing rules to accelerate and defer certain income or deductions, is the linchpin of year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered. So, too, sometimes fairly sophisticated “like-kind exchange,” “installment sale” or “placed in service” rules for business or investment properties come into play. In other situations, however, implementation of more basic concepts are just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payor, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered “in due course.”
State of Hawaii Tax Credits. Generally, Hawaii tax credits must be claimed within 12 months of year end. Therefore, if you may have qualified for a Hawaii tax credit in 2017 and did not claim it when filing your 2017 Hawaii tax return, you may still be able to claim the credit if you file an amended return before December 31, 2018.