As 2018 comes to an end, it’s time to think about year-end tax planning for 2018, and to plan ahead for 2019, especially with the new tax reform legislation passed by Congress last year. This article highlights potential tax-savings opportunities and strategies for you to consider.
How Can an Individual Plan His/Her Deductions?
Deduction timing is an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels, AMT, and filing status. Cash-method taxpayers should keep the following in mind:
- Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid. Under this rule, if the taxpayer’s tax rate is going to increase in 2018, it is a smart strategy to postpone spending until after year end to take the deduction in 2019.
- Payment by Check: Date checks before the end of the year and mail them before January 1, 2019.
- AGI Limits: The overall limitation on itemized deductions (i.e., the so-called “Pease” limitation) does not apply in 2018. In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 7.5% 10% for medical expenses, and 10% for casualty losses due to federally declared disasters. Note that the 2017 tax act (P.L. 115-97) suspended the ability to deduct all miscellaneous itemized deductions subject to the 2% AGI floor.
Lower Individual Tax Rates – An important number to consider is your “tax bracket,” or the rate at which your income is taxed. The new tax brackets for 2018 are as follows:
|Rate||Joint Return||Individual Return|
|10%||$0 – $19,050||$0 – $9,525|
|12%||$19,050 – $77,400||$9,525 – $38,700|
|22%||$77,400 – $165,000||$38,700 – $82,500|
|24%||$165,000 – $315,000||$82,500 – $157,500|
|32%||$315,000 – $400,000||$157,500 – $200,000|
|35%||$400,000 – $600,000||$200,000 – $500,000|
|37%||Over $600,000||Over $500,000|
Modification of the Alternative Minimum Tax (AMT) – AMT will continue to apply to individuals in 2018 and going forward, but the exemption amount and phase-out thresholds have been increased, so fewer people will be subject to the AMT. From 2018 to 2025, a higher AMT exemption will apply to income beginning with $109,400 for joint filers and $70,300 for single taxpayers. The exemption will phase out at $1 million for joint filers and $500,000 for single taxpayers.
Increase in the Standard Deduction – In 2018, the standard deduction increases from $12,700 to $24,000 for joint filers, and from $6,350 to $12,000 for single filers. Because there have been many changes to the itemized deductions this year, and because you will claim the higher of the standard deduction or itemized deductions, you’ll want to track your expenses and compare both methods as you may now benefit from a higher standard deduction instead of itemized deductions. The most significant change in itemized deductions is that there is a $10,000 cap on the amount of taxes you can deduct (a combination of state and local income taxes, property taxes, and sales taxes).
Charitable Contributions: Consider making charitable contributions at the end of the year. This will give the taxpayer use of the money during the year and simultaneously permit him/her to claim a deduction for that year. A credit card can be used to charge donations in 2018 even though the bill will not be paid until 2019. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. A special provision gives taxpayers the ability to distribute tax-free to charity up to $100,000 from a traditional or Roth IRA maintained for an individual who has reached age 70 1/2.
IRA and Retirement Savings – Tax-saving opportunities continue for retirement planning due to traditional and Roth IRAs among other retirement savings incentives.
Traditional IRAs – Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA in 2018 is $5,500. An additional “catch-up” contribution is allowed for taxpayers age 50 or older by the end of the taxable year, making the total limit $6,500 for the applicable individuals.
IRA Rollovers – In 2018, taxpayers may make only one IRA-to-IRA rollover per year. A second attempted rollover will be treated as a withdrawal and taxed at regular rates plus a possible 10% early withdrawal penalty.
Roth IRA – Roth IRA contributions are nondeductible, but earnings grow tax-free and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59 1/2. The contribution amounts follow the same rules as a traditional IRA – $5,500 plus an additional $1,000 “catch-up” if applicable.
Roth IRA Conversion – Funds in a traditional IRA, SEP, 401(a) qualified retirement plan, 403(b) tax-sheltered annuity, or 457 government plan may be rolled over into a Roth IRA. The rollover, however, will be considered taxable, and you will pay tax on the amount converted. No penalties will apply if the requirements for the transfer are satisfied. If you made a Roth conversion earlier in the year, you do not have the ability to recharacterize and undo the conversion.
401(k) Contribution – The 401(k) deferral limit is $18,500 for 2018. If the taxpayer’s plan allows for catch-up contributions and the taxpayer reaches age 50 by the end of the tax year, an additional $6,000 may be contributed to the account for a total maximum contribution of $24,500.
SIMPLE Plan Contribution – The SIMPLE deferral limit is $12,500 for 2018. If the plan allows for catch-up contributions and the taxpayer reaches age 50 by the end of the tax year, an additional $3,000 may be contributed for a total maximum contribution of $15,500.
Tax Benefits for Taxpayers with Children – Various tax-saving opportunities are available to taxpayers with qualifying dependents.
Child Tax Credit – A tax credit of $1,000 per qualifying child under the age of 17 is available on the 2018 tax return. The child must qualify as a dependent of the taxpayer and must be younger than the taxpayer. The credit is phased out for AGI exceeding $110,000 for joint filers and $75,000 for single taxpayers.
Credit for Adoption Expenses – The adoption credit limitation is $13,810 of aggregate expenditures for each child, except in the case of a special needs child when the credit is deemed to be $13,810 regardless of the amount of actual expenses.
Education Credits – The American Opportunity Tax Credit is available for qualified tuition and fees paid on behalf of a student (taxpayer, taxpayer’s spouse, or dependent) who is enrolled at least on a half-time basis. The maximum credit is $2,500 and is available for the first four years of the student’s post-secondary education. The Lifetime Learning Credit is also available for qualified tuition and fees paid on behalf of a student, but the student need not be enrolled on at least a half-time basis so long as the classes are being taken to acquire or improve job skills. The maximum credit for 2018 is $2,000. One way to take advantage of the credit for 2018 is to prepay spring 2019 tuition. In addition, if it is known what books the student will need for the spring 2019 semester, those can be bought in 2018 and the costs qualify for the credit for 2018.
Student Loan Interest – Taxpayers may be eligible for an above-the-line deduction for student loan interest paid on a qualified education loan. The maximum deduction is $2,500 and phases out after AGI of $165,000 for joint filers and $80,000 for single filers.
Healthcare Issues to Consider – Under the 2010 health care law, there is an individual mandate requiring individuals and their dependents to have minimum essential health insurance coverage or pay a penalty. The new tax legislation made the penalty $0 for 2019 and beyond, but the mandate and related penalties continue to apply for 2018.
Additional Health Care Considerations – Self-Employed individuals are allowed to claim 100% of the amount paid during the taxable year for self-employed health insurance premiums that covers medical care for themselves, spouses, and dependents as an above-the-line deduction (not limited to the 7.5% limitation that other medical expenses are subject to). Health savings accounts, or HSAs, are subject to rules similar to IRAs. Contributions to HSAs are deductible, but with limitations. For 2018, the deduction for an individual with self-only coverage under a high deductible health plan is $3,450; for an individual with family coverage under a high deductible health plan, the limit is $6,900.
Annual Gift Tax Exclusion – The most commonly used method for tax-free giving is the annual gift tax exclusion, which allows a person to give up to $15,000 to a donee without reducing the giver’s estate and lifetime gift tax exclusion amount. A person is not limited as to the number of donees to whom he or she may make such gifts. Additionally, spouses may combine their exclusions in a single gift from either spouse and may double the amount of their exclusion to $30,000 per donee.
Year-End Planning for Businesses
For business owners, tax planning is important at both the individual and business level. The new tax legislation that was passed by Congress has made some significant changes for business tax planning.
Qualified Business Income Deduction – The new tax legislation added a new deduction for individuals, trusts, and estates who are owners of non-C corporation businesses. This deduction can be as much as 20% of your qualified business income, with certain limitations and phase-out thresholds.
Excess Business Loss and Business Interest Deduction Limit – Beginning in 2018, taxpayers other than C Corporations are limited in their ability to deduct business loss. The excess loss that is disallowed is carried forward as part of the taxpayer’s net operating loss in succeeding years. The limitation for business interest expense was also substantially expanded for 2018.
Equipment Purchases – If you purchase equipment, you are eligible to expense (deduct) the cost of otherwise depreciable business property. For 2018, the expensing limitation is increased to $1 million and the phase-out is increased to $2.5 million. Additionally, the bonus depreciation deduction has increased to 100%, so taxpayers may deduct the full cost of certain business property, and this deduction can now be taken on used property.
NOL Deduction – Beginning in 2018, the limit on the NOL deduction is 80% of the taxpayer’s taxable income, and provides that amounts carried to other years be adjusted to account for the limitation. Amounts are carried forward indefinitely.
Business Tax Credits – The research and development credit, which allows eligible small businesses to claim a credit against the alternative minimum tax liability, has been preserved. The work opportunity credit, which allows employers who hire individuals in groups whose members have had difficulty obtaining employment to take a tax credit based on the wages paid to those employees, has also been preserved.
Corporate Tax Rate – Beginning in 2018, there is a flat 21% corporate tax rate; there is no special tax rate for personal service corporations. Additionally, the alternative minimum tax for corporations has been repealed.
International Tax Planning – There are various strategies to consider with respect to international tax. The new tax legislation has introduced additional foreign reporting requirements. If you have income from foreign sources, please consult us to ensure that you are compliant with foreign reporting requirements.
If you have any questions, please do not hesitate to contact a tax professional at MKS&H. We would be happy to meet with you at your convenience to discuss the strategies outlined above. While we are getting very close to the end of the year, there is still time to implement these strategies to minimize your 2018 tax liability.