As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly next. The following can help you understand the changes for 2018 and years to come.
Year-End Tax Planning Moves for Individuals
Itemized Deductions are Changing…
Beginning in 2018, many taxpayers who previously claimed itemized deductions will no longer be able to do so. The basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and many itemized deductions have been cut back or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees) and unreimbursed employee expenses are no longer deductible; personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses if they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won’t save taxes if they don’t collectively exceed the new, higher standard deduction.
Getting the most out of long-term capital gains…
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2018 is $70,000—then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won’t yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
Additional taxes on high income…
Higher-income earners must be cautious of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount. As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his/her estimated MAGI and NII for the year. (Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI).
The 0.9% additional Medicare tax applies to individuals with wages or self-employment income in excess of a threshold amount. While employers must withhold the additional Medicare tax from wages regardless of filing status or other income, self-employed persons must take it into account in figuring estimated tax.
Postpone income and accelerate deductions…
Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of income. These include: deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. In some cases, it may pay to actually accelerate income into 2018. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
Some taxpayers may be able to work around the new changes by applying a “bunching strategy” to pull or push flexible medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2018 deductions even if you don’t pay your credit card bill until after the end of the year.
Consider gifting as a strategy…
Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
The 2018 Tax Cuts and Jobs Act brought on numerous changes in tax rules for individuals. To further clarify and learn more on how you can reduce your tax bill for the upcoming tax year, please contact Caroprese & Company. We look forward to assisting you this tax season!
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CONTACTING CAROPRESE & COMPANY
This publication is provided by Caroprese & Company as a service to its clients and colleagues. The information and content included in this publication should not be construed as technical advice. Questions regarding any matters discussed in this publication should be directed to Brandon Caroprese whose contact information is listed below:
Brandon Caroprese, CPA, MST