TOP 2018 TAX PLANNING STRATEGIES FOR INDIVIDUALS
Tax reform significantly changed tax planning opportunities for individuals. Here are the top strategies available for individual taxpayers:
- Contribute to a retirement plan and/or Health Savings Account (HSA). These items are still fully deductible under tax reform.
- Assuming it makes investment sense to do so, sell investments with built-in losses to offset any recognized gains. You must not repurchase the investment sold at a loss for at least 31 days to be able to claim the tax loss.
- Charitable giving:
- Bunch multiple years’ gifts into one year so that your total itemized deductions exceed the standard deduction. By doing so, you itemize in one year and take tax reform’s higher standard deductions in subsequent years, which gives you an overall tax savings using the same dollar amount of donations. Use of donor advised fund allows you to take the deduction now while distributing funds to the charities over a multi-year period.
- Use appreciated securities for charitable gifts. As long as the investment was held more than one-year, you receive the full fair market value of the gift as a deduction but do not pay any capital gains tax.
- Taxpayers who are age 70½ or above can make charitable gifts directly from their IRAs. This provides an above-the-line exclusion of income rather than a potentially less valuable itemized deduction. It also counts toward the annual required minimum distribution.
- Re-evaluate the tax benefits of home mortgage debt and, especially, home equity loans. Limitations on home equity loan deductibility and overall limitations on itemized deductions may mean these items no longer provide a tax benefit; however, before making a decision it is also prudent to consider the potentially low cost of the debt and its overall place in the investment portfolio.
- Accelerate or defer income into the most tax advantageous year. Whether it be investment income, wage income such as a stock option, or investment income, timing the income in one year vs. another may be advantageous.
- Be mindful of income tax brackets and income:
- Long-term capital gains and qualified dividends are subject to a 0% federal tax rate if taxable income is below $77,400 for married taxpayers or $38,700 for individual taxpayers.
- When taxable income exceeds $315,000 for married taxpayers or $157,500 for individual taxpayers, the tax rate jumps from 24% to 32% and there are other phaseouts that occur.
- The child tax credit begins to phase out when modified adjusted gross income exceeds $400,000 for married taxpayers or $200,000 for others.
- Sole proprietor business owners or those who conduct their business via a flow-through entity may be eligible for the new Section 199A Qualified Business Income deduction.
- Inquire about the possibility of setting up an accountable plan with your employer for reimbursed employee expenses as unreimbursed expenses are no longer an allowed itemized deduction.
LIST OF CHANGES UNDER 2018 TAX REFORM
Tax Rates & Standard Deductions & Personal Exemptions:
In general, all the rates have been reduced with the highest rate being reduced from 39.6% to 37%. In addition, the new standard deductions have increased. Married filing jointly standard deduction is $24,000; Head of Household is $18,000; and all others are $12,000.
While both the tax rates and standard deduction changes have a positive impact for taxpayers, the personal exemption has been eliminated, offsetting some of the positive impact.
Child and family tax credit
The tax reform increased the child credit for children under age 17 to $2,000 and introduced a new $500 credit for a taxpayer’s dependents who are not their qualifying children. In addition, the phase-out limits for these credits have increased to $400,000 for joint filers ($200,000 for others), so that more individuals will be able to take advantage of this credit.
These changes (except as noted) to itemized deductions are in effect from Jan. 1, 2018 through Dec. 31, 2025
- State and local taxes (including property tax) is now limited to $10,000 ($5,000 for those filing married filing separately)
- Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). Loans in existence on December 15, 2017 are grandfathered (balance up to $1 million still allowed).
- Home equity interest is no longer deductible unless the debt relates to home improvements or acquisition indebtedness
- Donations to colleges and universities for ticket or seat rights at sporting events are no longer deductible
- Miscellaneous itemized deductions, such as investment management fees, tax preparation fees, unreimbursed employee business expenses and safe deposit box rental fees are no longer deductible.
- Medical expenses are deductible by the amount the expenses exceed 7.5% of adjusted gross income for 2018 (limit changes to 10% starting in 2019).
Other individual tax reform changes
- 529 Plans used to save for college expenses can now be used for private and elementary education ($10,000 limit per year)
- Alimony payments are no longer deductible, and the receiving spouse no longer needs to claim alimony as income for divorce agreements executed after December 31, 2018. There is no change in treatment for divorce-related payments required under agreements executed before 2019.
- The Estate and gift tax exemption has doubled to $11.2 million making fewer taxpayers subject to these taxes.
- The responsibility payment for not having minimal essential health coverage was repealed but not until 2019. Taxpayers will still be subject to a penalty in 2018 if they do not have coverage and do not meet one of the exceptions from coverage.
- The moving expense deduction disappears for tax years 2018 through 2025, but it’s scheduled to come back in 2026 unless Congress intervenes to eliminate it permanently
Business related tax reform changes
- Business Entertainment & Meal Expenses– old rules allowed for a 50% deduction; new tax law allows no deduction for entertainment. Entertainment related meals where no business is conducted are also not deductible. Business related meals continue to be 50% deductible. Meals provided to employees for the convenience of the employer (Including office snacks) which used to be fully deductible are now only 50% deductible.
- Qualified Small Business Deduction– this new deduction, effective for tax years 2018 through 2025, allows individuals a deduction of 20% of qualified business income from a partnership, S corporation or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. This deduction will reduce taxable income, but not adjusted gross income, and is available regardless of whether you itemize your deductions. There are many limitations and restrictions to this provision, so we advise that you schedule a personal consultation with us to fully understand the impact on your situation.
- Bonus Depreciation & Section 179 Expensing of Fixed Assets– The new tax reform bill has increased the bonus depreciation percentage to 100% until 2023, where it will decrease by 20% until it reaches zero. Bonus depreciation is now available for both used and new qualified assets. The Sec. 179 expense limit is now $1 million of allowable expensing with a total purchase threshold of $2.5 million. If you purchase more than $2.5 million in eligible fixed assets during the year, you will see a reduction in the amount you can expense under Sec. 179. These amounts are much higher than they have historically been and, in many cases, well beyond what an average business owner will spend in a given year. As part of your planning, we’d like to understand your asset purchasing plans, so we can maximize these deductions for you.
- Corporate Tax Rate– corporate tax rates have been consolidated into one 21% flat rate. The separate rate for personal service corporations of 35% has been repealed. These changes are effective for tax years beginning after Dec. 31, 2017.
- Net operating losses (NOLs) – the new tax law repealed the ability to carry back an NOL and claim a refund for already-paid taxes, effective for tax years starting after Dec. 31, 2017. If you have a tax situation that resulted in a NOL, we can advise you of the best options.
- Internet Sales Tax Reform– This summer the Supreme Court ruled that states may enact a sales tax on products sold within their state even if the source of the product is from a company with no physical presence in their state. The affect is to even the playing field between local retailers and internet retailers. Each state now can respond to this new legislation and implement a sales tax on internet retailers. In response, Minnesota will now require remote sellers to collect sales tax no later than October 1, 2018. Other states are most likely going to follow suit. This is an evolving process. If this impacts your business, please give us a call to discuss the potential requirement to remit sales tax to the various states.