Here are 12 action items you should be thinking about NOW:
1. Are you better off with the standard deduction than the itemized deduction? Many more taxpayers in 2018 may no longer receive a tax benefit from itemized deductions that they had received in the past. The standard deduction is now $12,000 for single filers and $24,000 for joint filers, and common itemized deductions have been reduced or eliminated like the state and local tax deduction (limited to $10,000 for the aggregate of state and local property taxes and income or sales taxes), the interest deduction, the casualty loss deduction and the miscellaneous itemized deductions over the 2% of AGI. You may be better off “bunching” those itemized deductions into one year and claim the standard deduction in the other year. One itemized deduction that is easily bunched is charitable contributions. Read our prior article “Charitable Giving Strategies and Solutions” here: http://www.fuoco.com/resources/tax-alerts/340-charitable-giving-strategies-and-solutions.
2. Have you done any home improvements? Taxpayers with line of credit interest should consider documenting the cost of home improvements that would support claiming at least a portion of that interest as qualified mortgage interest.
3. Facing large medical bills? You may have a strong incentive to incur them this year. The law lowered the threshold for deducting unreimbursed medical expenses from 10% of adjusted gross income (AGI) to 7.5% for all taxpayers in 2017 and 2018. Next year, though, the threshold returns to 10%, making it harder to qualify for the deduction. Qualified medical expenses are broadly defined as the costs of diagnosis, cure, mitigation, treatment or prevention of disease and the costs for treatments affecting any part or function of the body. Track payments to physicians and dentists, as well as medical equipment and supplies, diagnostic devices and prescription drugs. Travel expenses related to medical care are also deductible.
4. Have you checked your withholding lately? 2018 withholding tables went into effect in March 2018, and while the new tables adjusted for lower tax rates, increased standard deduction, and the elimination of exemptions, those tables did not adjust for the loss of itemized deductions. This has created the potential for under-withholding in 2018 unless you have adjusted your estimated tax payments or withholding accordingly. Consider revising Form W-4 for the remainder of the year to add a dollar amount to compensate for any anticipated under-withholding.
5. Are you a “pass-through” entity? Have you figured out your QBI (qualified business income) and how to take advantage of the new the 20% deduction if eligible? You may want to consider restructuring, aggregating businesses or breaking up businesses. For help calculating your QBI, please read our prior article “Tax Reform’s 20% Tax Break for Pass Through Entities – Exceptions Apply” here: http://www.fuoco.com/resources/tax-alerts/344-tax-reform-tax-break-for-pass-through-entities
6. At risk for an IRS Audit? New partnership audit rules are effective for 2018. The choices are: designation of a partnership representative, electing out of the rules if you are a smaller partnership, or pushing out liability for audit adjustments under the new rules from the partnership to the partners. These actions should be taken ASAP before an IRS audit materializes!
7. Does your child need a Social Security number? They do if they are a child for whom the new higher Child Tax Credit is claimed. Taxpayer Identification Numbers are only sufficient for the new $500 credit for a qualifying dependent. Social Security numbers can be issued up until the filing date for the tax return.
8. Have you checked out the new options to pay elementary and secondary school tuition from 529 savings plans? In the past, parents often used tax-favored Section 529 plans to save for the college education of their children. Tax Reform expanded the scope of these programs and the definition of qualified expenses is broadened to include tuition for enrollment at an elementary or secondary public, private or religious school. However, the new law limits the tax-free distributions to $10,000 a year. Check out our prior article “The New ABCs of 529 Plans” here: http://www.fuoco.com/resources/tax-alerts/337-here-are-the-new-abcs-of-529-plans
9. Got gains or losses? Review your investment portfolio now to see if it makes sense to realize gains and losses before year-end. “Loss harvesting” to shield gains from the capital gains tax remains advisable for 2018, particularly for high-income taxpayers. A net capital loss that can be offset against more highly taxed ordinary income is ideal. Check with your Fuoco Group advisor about whether it is better to realize capital losses to offset capital gains in 2018, taxed at a maximum rate of 20%, or to postpone those losses into future years when, if there are no capital gains, they might offset ordinary income that would otherwise be taxed as high as 37%. You might also consider selling depreciated assets and contributing the proceeds to charity – see article link under #1.
10. Had a big birthday recently? Maximize contributions to 401(k) plans and 529 plans for 2018 ASAP, including “catch-up” contributions. Keep in mind that the deadline for certain retirement account contributions is after the end of the year, so you can take advantage of this through early 2019. Convert a traditional IRA to a Roth IRA if appropriate. Take required minimum distributions if you had a birthday recently and turned age 70-½ years old.
11. Worried about the AMT? Not many taxpayers will be affected this year due to the fact that thresholds have risen dramatically. If you have exercised incentive stock options during 2018, consider selling the stock before year-end if the values have significantly declined since the exercise date. The TCJA did include a provision permitting non-highly-compensated employees to make an election to defer tax on stock options for up to five years.
12. Have you re-examined your estate plan? Consider taking full advantage of your gift and estate tax exclusion, which lets you make gifts during your life or make transfers at death without paying federal gift or estate tax. Don’t forget about portability either. TCJA did not change the structure of the estate tax, the unlimited marital deduction, or estate tax rates, and continues the portability of estate tax exemption between spouses. TCJA also does not change the provisions of the federal gift tax. The Act increases the amount of estate, gift and generation-skipping transfer exemption of an individual from $5 million to approximately $11.2 million for 2018. Thus, a married couple now has over $22 million of exemption. There is a sunset at 12/31/2025 however. (Remember the increase in the exemption has immediate implications for Wills and Living Trusts with formula clauses). Consider basis step-up planning if appropriate. You may want to read our prior article “Estates, Trusts And Tax Reform – New Legacy Planning Perspectives” here: http://www.fuoco.com/resources/tax-alerts/351-estates-trusts-and-tax-reform–new-legacy-planning-perspectives
Contact Us: The time for year end tax planning is now – rather than wait and lose the opportunity to minimize your tax liabilities, get a head start and greet 2019 in the best financial shape possible! Contact our tax planning professionals in New York or Florida for an appointment today by calling toll free: 855-534-2727.
