As everyone is aware by now, the tax reform package that became law at the very end of last year contained numerous provisions, some that will most likely affect your income tax situation in one way or another and some just to make our jobs a little more…exciting! While we have spoken to many of you over the course of the year to determine what changes, if any, you should make for some of the items, we wanted to take a minute to revisit just a few of the tax law provisions that will affect most of you and give you a few last minute suggestions.
• Most of the tax brackets have been lowered for 2018, which is great news for the majority of you. Please keep in mind that these reduced tax brackets took effect near the beginning of 2018. So, W-2 wage earners have already realized these benefits during the year with reduced withholding from paychecks and correspondingly more take-home pay. This should balance out, in theory, on your tax returns. If you have not already done so, you should really consider maximizing your retirement contributions for 2019 given the extra bump in net pay.
• Our traditional tax planning for small business owners should still be considered. In that regard, we would recommend deferring business income for the next few days, if possible, and accelerating any expenses that you can into this year. We would recommend paying any expenses that you would otherwise pay during the first 15 days of January before the end of December; that does not mean that the check has to clear, you just need to send it off. You will receive the tax benefit one full year in advance if you report on the cash basis, which most of you do. And, of course, you have the desperately complicated (I mean “simplified”) 20% pass-through entity business income deduction that will likely be beneficial to a lot of you with flow-through entity income. They are still hammering out the final guidance on those rules (imagine that!), but the basics are in place, and we have factored that into our projections this year.
• As seemingly negative as the inexplicable market sell-off has been these past few weeks, it does present an opportunity to now harvest any capital losses to offset those capital gains you probably realized in the earlier part of the year. If you have outside investments, this would be worth considering over the next few days.
Caroline & Reid Schultz
• Many more of our clients will find themselves using the standard deduction this year rather than itemizing their deductions for several reasons: - The standard deduction has virtually doubled for 2018 from the prior year. For single filers, it will be $12,000 and for married couples filing jointly, it has increased to $24,000.
- The elimination of Schedule “A” miscellaneous itemized deductions. The deductions that are no longer allowable include, but are not limited to, unreimbursed business expenses for W-2 taxpayers, investment management fees and tax return preparation expenses. We have advised W-2 income earners to try and work with their employers to arrange a business expense reimbursement plan. If you were not able to do that this year, you might consider that approach in 2019.
- Schedule “A” state and local income tax and property tax deductions are limited to $10,000. Therefore, unlike all other past years, very few of you will benefit from paying your 4th quarter state estimated tax payments early. Hold on to your money for a little bit longer and pay your estimated tax payments by the actual due date, January 15, 2019. Also, we would recommend not prepaying any other type of taxes either as it will likely not be beneficial to do so.
- Mortgage interest deductions are limited to $750,000 of principal residence and second home debt. This debt limit was previously $1,000,000 with a home equity line kicker of $100,000, but that home equity line kicker no longer exists. Therefore, if your debt is greater than $750,000, you might consider ways to pay down your principal or talk with us about ways to potentially make the remainder of your interest deductible in some other capacity.
• If you are teetering somewhere between using the standard deduction and itemizing your deductions, you might accelerate charitable gifts that you would otherwise make over the next few days to push you over the threshold. Charitable giving is one of the only itemized deductions that has not lost any of its value for taxpayers.
• Speaking of charitable giving in combination with the standard deduction, if you are over 70 ½ and take a required minimum distribution (RMD) from an IRA, you should plan to give directly from your IRA. This will directly reduce the taxable amount of your RMD and will not affect your standard deduction at all.
• In 2019, the estate tax exemption will be a whopping $11.4 million per person. That remains a significant hike over the amounts from 2017 and can still be transferred to your spouse upon death for a collective estate tax exemption of $22.8 million. In that regard, we would encourage you to keep playing the lottery! The annual gift exclusion will remain at $15,000 per person per recipient, as it was for 2018. If you have been meaning to give a non-taxable gift this year, you have a few more days to take advantage of the annual exclusion for 2018.
• 529 accounts can now be used to save for elementary, secondary and higher education. Consider making contributions and having family members make contributions. The amounts that you can withdraw for lower level education are limited, so please discuss with us before doing so.
• Since there is no exemption allowance in 2018, those of you with children will likely see an increased child tax credit. It doubled to $2,000 per child under 17 years of age. And it will be available to more filers as the income threshold to receive the credit has been bumped for joint filers who make up to $400,000.
• Likely, a lot less of you will be hit with the AMT in 2018 since the exemption amounts and the phaseout thresholds have been increased. We know a lot of you are excited about that one!
One more item to note. Do not be surprised when you open your tax package this year and see a very different looking tax return. With the “simplifications” in the tax law, the lawmakers also decided to simplify the individual tax return to postcard size. Many items from the old tax return format are consolidated or shifted to schedules. So, while the first two pages of your tax return may now be the size of a postcard, you might see a lot more schedules in the body. See, we told you this was fun! We wish you all a very happy holiday season and a happy 2019!
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