With year-end approaching, now’s the time to speak with your tax advisor about planning that could help reduce your tax liability for 2018. Below are a few strategies to consider.
Contributing to retirement plans
Deferring income to retirement plans is an easy way for individuals to lower taxable income for this year while saving for future years at the same time.
Taxpayers who are employed and participate in a 401(k) can contribute up to $18,500 during 2018.
If you have a traditional IRA, your contribution limit for 2018 is $5,500, or $6,500 if you are 50 or older. Keep in mind if you or your spouse is covered by a retirement plan at work and your income is above certain limits, you may be restricted in deducting the IRA contribution.
Self-employed individuals may contribute up to $55,000 to a SEP IRA for 2018, all of which is tax-deductible.
Planning for capital gains
For 2018, joint filers’ capital gains are taxed at 15% until their income reaches $479,000. Once their income exceeds $479,000, capital gains are taxed at 20%.
Taxpayers who are over the threshold may consider selling some depreciated investments to generate losses in order to offset the gains. In some cases it may be possible to lower income enough so that the gains are taxed at 15%.
Accelerating and deferring income
In certain instances you may have the opportunity to accelerate income into the current year or defer income into the next tax year.
It’s important to run projections to determine taxable income for the current and future tax years. Depending on which income tax bracket you’re expected to fall into, you may be able to save on taxes by accelerating or deferring income.
Planning for changes to deductions
The Tax Cuts and Jobs Act (TCJA) increased the standard deduction by nearly doubling it. For example, joint filers will now receive a $24,000 standard deduction for 2018, increased from $12,700 in 2017.
On the flip side, under the new tax law there are no longer personal exemption deductions, and many other itemized deductions have been limited or eliminated. Here are a few of the changes:
- The state and local tax deduction is now capped at $10,000, before TCJA, the state and local tax deduction was unlimited.
- Home mortgage interest deduction is now limited to home acquisition debt of up to $750,000 for loans incurred after December 15, 2017. There is no longer a deduction for home equity debt. Prior to TCJA, interest paid on home acquisition debt of up to $1,000,000 and home equity debt of up to $100,000 were deductible.
- There is no longer a deduction for miscellaneous itemized deductions subject to the 2% income floor. These deductions include tax preparation fees, employee business expenses, and investment management fees.
Many taxpayers who historically itemized will now take the standard deduction due to the increased amounts and limited or eliminated itemized deductions.
Making charitable contributions
Taxpayers who are required to take required minimum distributions (RMDs) from an IRA, and will not itemize due to the new tax law, may still benefit by making charitable contributions directly from their IRA. The amount contributed counts towards the RMD, which reduces the taxable amount of the IRA distribution.
- For example, if you are required to take $50,000 in RMDs and contribute $5,000 directly to a qualified charity, you will only pay tax on $45,000 of the IRA income.
If you plan on making charitable contributions annually, and you are close to the threshold for taking the standard deduction versus itemizing, it may make sense to double your charitable contributions every other year instead of making an annual contribution to take advantage of itemizing:
- For example, let’s say you have $18,000 of itemized deductions before any charitable contributions and make a $5,000 charitable contribution annually. After the contribution, you would have $23,000 of itemized deductions. This amount is under the standard deduction amount of $24,000 and so you would receive no benefit for the contribution in this scenario.
- If you waited until the following year and contributed the $5,000 you planned to contribute from the prior year, plus an additional $5,000 for that year, your itemized deductions would be $28,000. You would receive an additional $4,000 deduction just due to the timing of the contributions.
These are just a few examples showing the importance of tax planning before year-end. Contact a tax advisor to learn more about how the Tax Cuts and Jobs Act may impact your 2018 tax bill and what you can do now to prepare. Kaufman Rossin’s tax professionals can help you understand the provisions and how to navigate the new tax law to maximize benefits.