With 2018 quickly nearing its conclusion, we are considering tax strategies to benefit clients in 2018 and beyond. This year-end has been especially busy due to the Tax Cuts and Jobs Act (TCJA), which was enacted in December of 2017. The tax planning landscape has changed considerably since then; the most significant changes to the tax laws and their corresponding planning opportunities are listed below.
Seven New Tax Brackets:
|
Income Tax Rate |
Income Levels for Those Filing As: |
||
|
2017 |
2018-2025 |
Single |
Married Filing Jointly |
| 10% | 10% | $0-$9,525 | $0-$19,050 |
| 15% | 12% | $9,525-$38,700 | $19,050-$77,400 |
| 25% | 22% | $38,700-$82,500 | $77,400-$165,000 |
| 28% | 24% | $82,500-$157,500 | $165,000-$315,000 |
| 33% | 32% | $157,500-$200,000 | $315,000-$400,000 |
| 33-35% | 35% | $200,000-$500,000 | $400,000-$600,000 |
| 39.6% | 37% | $500,000+ | $600,000+ |
Increased Standard Deduction/Eliminated Personal Exemptions: The standard deduction increased to $12,000 for individuals and $24,000 for married couples who are filing jointly. Personal exemptions of $4,050/person have been eliminated.
Certain Personal Deductions Eliminated: The TCJA will no longer allow taxpayers to deduct tax preparation fees, investment management fees, and unreimbursed business expenses. Unless taxpayer homes are in federally declared disaster areas, personal casualty losses are also disallowed.
State and Local Tax Deduction: Combined state income taxes and property taxes are capped at $10,000 per year. In prior years, depending on your individual tax situation, there might have been a benefit to prepay your states taxes by December 31st; however with the new limits, it is likely that this will not be the case.
Charitable Contributions – General: Donations made to charitable organizations are still deductible if taxpayers itemize their deductions. With the increase in the standard deduction to $24,000 per year and limiting the state tax deduction to $10,000 per year, fewer people will itemize going forward. Depending on your situation, if you are not itemizing or if you are barely over the standard deduction, you may want to consider grouping your charitable gifting in one year. For example, if you typically gift $5,000 per year, we may encourage you to prefund future gifts for two or three years. This means that you would gift either $10,000 or $15,000 to a Donor Advised Fund. This would allow you to receive an increased benefit for charitable contributions. You could use the funds within the Donor Advised Fund for future gifts, rather than gifting these funds all in one year.
Charitable Contributions – Appreciated Assets: Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for longer than one year. This will yield a double tax benefit: this type of gifting will allow you to deduct charitable donations for the fair market value of the donated assets without paying capital gains taxes.
Charitable Contributions – IRA Funds: If you are over the age of 70 ½, you may be eligible to contribute a maximum of $100,000 to charity. Such a donation would, in this circumstance, satisfy the required minimum distribution (RMD) without being included in income. In other words, this donation allows for a charitable contribution without income limitations. Please note that any charitable gift from an IRA must be made directly from the IRA to the charity. SEP or SIMPLE IRAs are not eligible.
Mortgage Interest Deduction: Taxpayers may now deduct mortgage interest on new loans up to $750,000 of principal. Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered”, interest can be deducted up to $1M of principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment as long as the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible.
Loss Harvesting: Consider harvesting unrealized capital losses to offset any net realized capital gains. Please be aware of the wash sale rules, which may disallow your capital loss if you have any intention of repurchasing the same securities within 31 days after your sale. If you own securities that have become worthless, or if you have made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction. We are happy to assist in reviewing losses to determine if they are eligible for Section 1244 treatment as ordinary losses.
Qualified Small Business Stock (QSBS): Gain on the sale of Qualified Small Business Stock that is held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100% depending on your date of purchase.
Qualified Opportunity Zones: Capital gains realized and re-invested in Qualified Opportunity Funds (designed to bring private funds into lower-income and distressed communities around the nation) may be eligible for gain deferral and potentially full gain exclusion if held longer than 10 years.
Passthrough Deduction: The IRS has just released additional regulations and guidance regarding who might be eligible for the 20% income from passthrough deduction. We encourage you to reach out to us regarding questions about this potential deduction as the calculations are complex and, in certain circumstances, may be limited.
Stock Options: If you own options with fast approaching expirations dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. When to exercise options is a matter of personal preference contingent upon your own beliefs about the future potential of the stock. However, we must caution that there are major tax implications to consider.
Gifting: For 2018, the annual gift tax exclusion has increased to $15,000 from $14,000 while the lifetime exemption has increased from $5,490,000 to $11,180,000.
Business Update – Bonus Depreciation: The TCJA provides for full and immediate expensing of 100% of the cost of qualified property acquired and placed in service during the period between September 27, 2017 and January 1, 2023. Additionally, bonus depreciation is now available for both new and used qualified property.
We are prepared and excited to strategize with you so that you may reap any benefits available to you according to the latest tax reforms. We are happy to discuss any questions that you might have about minimizing your taxes and maximizing any benefits you receive from the deductions or credits presented above. Please do not hesitate to contact us for more specific advice regarding your individual tax planning needs.