The 2018 tax year will mark the first year subject to the changes in effect from the Tax Cuts and Jobs Act (TCJA). We have compiled a list of potential planning strategies that may benefit you or your family. We have placed a special emphasis on strategies connected to changes from the TCJA. We encourage you to take a moment and consider whether there are any beneficial last moment actions you can take.
Year End Tips for Individual
1. Manage Sales of Investments
If you own stocks that have been held for over a year, your gains will be taxed at preferential capital gains rates. These rates max out at 20 percent for high income taxpayers, meaning they are lower than rates on ordinary income such as salaries. If your taxable income is below $425,801 (single) or $479,001 (married filing jointly) for 2018, you will have a maximum rate of only 15 percent on long-term capital gains.
If you sold stocks that were held for less than a year during 2018, the gains will be taxed at ordinary rates rather than the special capital gains rates. If you are in this situation, you might want to consider whether you have any stocks in a loss position that can be sold. Capital losses can be used to offset short-term gains that would otherwise be taxed at a rate of up to 37 percent, plus any applicable 3.8 percent investment income tax.
If you already have capital losses that are being carried forward from a previous year, you may be able to sell stock that you have had for less than a year without creating any tax bill. For example, if you are carrying forward $50,000 of past capital losses, you could sell investments held for under a year for up to $50,000 in short-term capital gains without creating any additional taxable income.
2. Gift Giving
There can be tax benefits associated with giving gifts to family, friends, and charitable organizations. However, certain forms of gift-giving are better for tax purposes than others.
If you are planning on giving investments to a relative or friend in a lower income tax bracket, it is better to give away stocks that have gained value. The recipient will still have to pay capital gains tax if they sell the stocks, but they will pay at a lower rate. If the shares pay annual dividends and the recipient chooses to keep them, there will still be a benefit because they will pay a lower tax rate on the dividends received. However, be cautious if you are planning on giving gifts to people who are younger than 24, because a “kiddie tax” with higher rates may apply.
For shares that have decreased in value, it is generally better to sell the stock and gift the cash proceeds from the sale. Due to IRS rules about how loss property carries over, the recipient will not receive as much benefit as you would from selling the shares at a loss. It is preferential in this case for the original owner to sell and create a capital loss that can offset gains in the future.
For 2018, the annual gift exclusion is $15,000 per person or $30,000 to a couple, or $60,000 from a couple to a couple. Giving gifts annually can create savings on gift and estate taxes in the long run. The annual exclusion cannot be carried forward if you have an unused portion in any given year.
If you give appreciated property that you have owned for more than a year to charity, you can deduct the fair market value of the gift and you will not have to pay capital gains on the appreciation. As an added bonus, the charity will not have to pay any tax if it sells the donated property.
3. Consider Alternating Years for Standard and Itemized Deductions
In 2018, standard deductions have nearly doubled from 2017 amounts. Last year, a married couple would have needed itemized deductions over $12,700 to exceed the standard amount. This year, a married couple will use the standard deduction unless they have over $24,000 in itemized deductions.
Several changes to itemized deductions will also make it more difficult to reach the new thresholds. The most significant change to mention is that the deduction for state and local taxes, which includes wage withholdings and property taxes, is now capped at $10,000. Some itemized deductions have also been eliminated altogether, including unreimbursed employee expenses and investment advisory fees.
However, if you will be close to the itemized deduction threshold in 2018, you can consider making additional expenditures before year-end. One strategy is to “bunch” deductions by making larger charitable donations every two years rather than donating a smaller amount each year. You could benefit from a charitable itemized deduction in the year that you make the larger donation, while planning to take the standard deduction in the donation-skipping year.
Other “bunching” strategies if you are close to exceeding the itemized threshold include scheduling necessary medical procedures before year end or prepaying property taxes that are due in early 2019 (if you are below the $10,000 state and local tax cap).
4. Use a Health Savings Account for Medical Expenses
For 2018 taxes, qualified medical expenses are deductible if they exceed 7.5 percent of adjusted gross income (AGI). In 2019, the threshold increases to 10 percent of AGI. The increase in the threshold, combined with larger standard deductions, means that it is likely fewer taxpayers with qualify for a medical deduction than in past years.
If you will not have high enough medical expenses to qualify for a deduction, and you have a qualifying high deductible health care plan, it could benefit you to fund medical costs with pre-tax dollars using a Health Savings Account (HSA). You can contribute up to $3,450 for yourself or $6,900 for your family if you qualify for an HSA, with an additional $1,000 allowed if you are 55 or older.
5. Think About Investing in a Qualified Opportunity Zone (QOZ) program
The Tax Cuts and Jobs Act created this program to improve growth in economically distressed areas. Taxpayers can sell appreciated property and re-invest the gain into a Qualified Opportunity Fund (QOF) within 180 days. The QOF funds will be invested in improving a property within a Qualified Opportunity Zone.
The capital gain from the original asset sale will be deferred until either you sell your interest in the QOF or until the end of 2026, whichever is earlier. You can also benefit from a 10 to 15 percent exclusion on the deferred gain, with the amount of the exclusion depending on how long you hold the QOF investment.
If you hold the investment for a minimum of ten years, the appreciation of the value of your investment in the fund will be tax free.
6. Consider converting a retirement account (401(k), 403(b), IRA) to a Roth IRA.
A Direct Rollover is generally used when moving funds from an employer plan (e.g. former employer 401(k) or 403(b)) to an IRA. There is no tax consequence and there is no withholding. If you are moving the funds to a Roth IRA, there are taxes due from the Roth conversion. However, now this money can grow tax free and you can live tax free during retirement, which is often lower income years. However, If you are currently employed with your employer, you are usually only allowed to move funds from the employer’s plan when you have reached retirement plan age under the plan. This is usually 55 or 59 1/2 depending on your employer’s plan.
CORRECTION FROM OUR PRIOR NEWSLETTER: For 2018 and beyond, you cannot reverse the conversion of a traditional IRA into a Roth account. Under prior law, you had until October 15 of the year after an ill-advised conversion to reverse it and thereby avoid the conversion tax hit.
We encourage you to look closely at these alternatives and contact your CPA to determine if any of these moves would be a good strategy for your tax situation.