10 year-end tax-planning tips after tax reform
1. Double-check your withholding and estimated taxes
The individual tax changes cut both ways. If you are in danger of being penalized for underpaying tax throughout the year, you can make up the shortfall through increased withholding on your salary or bonus. Bumping up your last quarterly estimated tax payment can still expose you to penalties for underpayments in previous quarters. But withholding is considered to have been paid ratably throughout the year, so a big jump in withholding on high year-end wages can save them in penalties.
2. You should understand whether to take the standard deduction.
Millions of taxpayers who routinely itemized deductions in past years are expected to take the standard deduction in 2018. That’s because the standard deduction is doubled, while dozens of itemized deduction are repealed and the state and local tax deduction is capped at $10,000. It’s critical for clients to know whether they should expect to take the standard deduction before making decisions on year-end spending on things that generate itemized deductions. Taxpayers generally would not get any additional deduction for things like charitable gifts or elective health care procedures if they do not itemize deductions.
3. Get your charitable house in order.
If you will be itemizing deductions and plan on giving to charity before the end of the year, you should remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, they must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgment from the charity that includes a description of the car. You cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
4. You should be careful with your mortgage deduction.
Tax reform lowered the amount of debt taxpayers can use to claim a mortgage interest deduction from $1.1 million to $750,000. But there are grandfathering rules for some pre-existing mortgages. If you have a mortgage between $750,000 and $1.1 million, you should be aware of the rules before modifying a mortgage to make sure you don’t lose a valuable deduction.
5. Leverage retirement account tax savings.
Retirement incentives for traditional retirement accounts like a 401(k) or individual retirement account still offer some of the most valuable tax benefits. It’s not too late for taxpayers to increase their contributions. Contributions reduce taxable income at the time they are made, and clients don’t pay taxes until they take the money out at retirement. The 2018 contribution limits are $18,500 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).
6. Defer capital gains by investing in an opportunity zone fund.
Tax reform created one of the most generous tax incentives ever to encourage investment in areas in need of development. If your clients are thinking of selling assets that would generate large capital gains this year, they can defer the gain if they invest an equal amount in an opportunity zone fund within six months of the sale. You won’t recognize the gain until the investment is sold, or by Dec. 31, 2026, at the latest. You can get up to 15 percent of the deferred gain forgiven entirely for holding the investment for specified time periods, and if you hold the investment 10 years, you will pay no tax on any additional gain. There are more than 8,000 opportunity zones throughout the United States and numerous funds are expected to be open to investors.
7. Remember state and local tax obligations.
State and local governments impose their own filing and payment responsibilities with various income, sales and property taxes. The changes to federal tax rules make filing state taxes even more difficult. Be sure to check the states where your clients pay taxes to understand if the states are following the biggest changes to federal rules.
8. Consider large purchases before state taxes on internet purchases are effective.
The U.S. Supreme Court’s South Dakota v. Wayfair ruling this year erased a restriction on when states can require internet sellers to collect state sales tax. The rules were always complex, but under the previous Supreme Court standard, businesses generally could not be forced to collect taxes on online sales in states where they had no physical business presence. The Supreme Court struck down this standard, and dozens of states are enacting laws requiring businesses to collect tax on internet sales even when the business has no physical presence in the state.
If you live in a state with a new law that isn’t effective yet, you should consider making big holiday purchases before the new rules go in force. But you should be careful, because the laws in each state are different and whether tax is imposed now or in the future may depend on who the seller is. Taxpayers should only accelerate purchases that would be free from sales tax now, but won’t be in the future. (It should also be noted that most states also impose use taxes.)
9. Don’t squander the gift tax exclusion.
Taxpayers can give up to $15,000 to as many people as they wish in 2018, free of gift or estate tax, and get a new annual gift tax exclusion every year, so they shouldn’t let it go to waste. Taxpayers and their spouses can use their exemptions together to give up to 30,000 per beneficiary. If you have four children and 10 grandchildren, for example, they can remove $420,000 from their estate tax-free this year.
10. Leverage low interest rates and generous exemptions before they’re gone.
The historically low interest rates and lifetime gift and estate tax exemption presents an even better estate planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. With the economy growing and unemployment down, the Federal Reserve has been raising rates. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. Tax reform doubled the gift and estate tax exemptions, but like the rest of the individual provisions, this change is set to expire in a few years.