As a new year approaches, many of us will reflect on the year that has passed. Personal and professional accomplishments may take center stage. And we may take stock of any disappointments and recalibrate as 2019 approaches. Let’s not let lack of tax planning be one of those disappointments!
Year-end tax planning is probably the last thing on your mind. It’s a busy time with Christmas shopping, holiday parties, tree trimming, family visits, and year-end cheer already on your calendar. Yet it’s not too soon to start thinking about taxes, especially with the changes from the 2017 Tax Cut and Jobs Act (TCJA). It is one of the largest tax rewrites ever and causes confusion to many.
Before I jump in, let me stress that as a fiduciary financial planner my job to assist you and point you to other financial experts as necessary. Everyone’s financial situation is different. When it comes to tax matters, I recommend you check with your CPA or tax advisor. I can’t overemphasize this enough and I would be happy to review the options that are best suited to your personal situation.
You may download our complimentary 4-page PDF TCJA Reference Guide and Year End Tax Planning Checklist here to review with your tax preparer well before Dec 31.
Key Changes in the TCJA
The TCJA overhaul covered both individual and corporate income taxes. Most will see their tax bill decline when they file, but a few folks may see a sharper bite. I touched on some of the changes in a previous Insights Article. You can refer to that for more detail. Here I will just summarize the tax bracket changes:
- Tax brackets and tax rates have changed. The lowest bracket holds at 10% but the top bracket has been lowered from 39.6% to 37%. There have also been modest adjustments to the rates and income levels for taxable income.
7 Year-End Tax Planning Tips and Strategies
All these year-end tax planning tips and strategies may not apply to everyone, but if you can find one or two that apply, it may make a large difference in what you owe Uncle Sam. These are just some of the areas you can explore further with your CPA or tax preparer. Download the TCJA reference guide and checklist for even more ideas.
- Small Business Owners and the QBI
With certain limitations, the new tax code allows small business owners with pass-through income from their business (not C corp), to be eligible for a 20% Qualified Business Income (QBI) deduction. One limitation is for a specified service trade or business (SSTB) if the income exceeds $415,000 for married filing jointly or $207,500 for any another filing status. A different income limitation exists for non-service based business: $315,000 for married filing jointly or $157,500 for any other filing status. (It’s never simple!)
If your income will exceed these levels, your year-end tax planning strategies may involve delaying income until 2019 or some of the other tax strategies discussed below.
- Self-Employment Deductions
If you are self-employed, don’t forget the major deductions of funding your retirement plans such as a SEP or a SIMPLE. Even if you don’t itemize deductions, these self-employment deductions are still available to you and can have a huge impact on lowering taxes.
Also, if you and your spouse are not eligible for medical coverage by an employer health plan, your healthcare coverage, including Medicare, is deductible as a self-employed individual.
- Tax loss harvesting
You have until Monday, December 31 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.
- Mutual funds and taxable distributions
This is best described using an example.
If you buy a mutual fund on December 18 and it pays a dividend and capital gain December 21, you will be responsible for paying taxes on the entire yearly distribution, even though you held the fund for just three days. It’s a tax sting that’s best avoided because the net asset value hasn’t changed.
It’s usually a good idea to wait until after the annual distribution to make the purchase. Many mutual funds will publish their annual distribution plans in November or December. Look for those online or call the mutual fund company before investing. It’s always best to avoid surprises!
- Don’t miss the RMD deadline
Required minimum distributions (RMDs) are minimum amounts a retirement plan account owner must withdraw annually, generally starting with the year that you reach 70½ years of age. Some plans may provide exceptions if you are still working.
The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.
The RMD rules apply to traditional IRAs, SEP IRAs. Simple IRAs, 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans. They do not apply to ROTH IRAs.
Don’t miss the deadline or you could be subject to steep penalties – up to 50% of the amount of the RMD you should have paid.
- Contribute to a Traditional IRA or HSA, if applicable
You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. Total contributions for both accounts cannot exceed the prescribed limit.
There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older. In 2019, limits will rise to $6,000 and $7000, respectively.
You can make 2018 IRA contributions until April 15, 2019 (Note: state holidays can impact final date).
If you have a high deductible medical plan through your employer, consider maximizing your HSA contributions. Those dollars can be carried over year after year (unlike FSA accounts).
- Charitable giving
Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income.
Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70½ years old? A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity (“End-Of-Year Contribution and Distribution Planning for Tax-Favored Accounts”–Kitces.com).
This becomes even more valuable in light of tax reform as more taxpayers will no longer be able to itemize, and an RMD that is taken, then donated to a charity, may not provide tax benefits.
Given the increase in the standard deduction and limits on state income and property taxes, annual year-end gifts to your favorite charity may not exceed the higher thresholds. Therefore, you may consider giving an annual gift in early January. Coupled with an annual gift next December, you might reap the tax advantages from itemizing in 2019.
You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
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