2018 Year-End Tax Planning Opportunities

2018 year-end tax planning strategiesErin Itkoe, CFP®, CPA®/PFS

The end of the year is the time for celebrating the holidays with family and friends. It is also an opportune time to take advantage of tax planning strategies before the calendar flips to January.

With the passing of the Tax Cuts and Jobs Act in 2017, the tax planning landscape has changed. In the past, taxpayers who routinely itemized deductions may now be expected to take the standard deduction. This change is because the standard deduction was doubled, and many itemized deductions were repealed. Additionally, the deductions for state and local income taxes and property taxes is now capped at $10,000.

Before taking into consideration the tax planning strategies, it is critical to know whether you should expect to take the standard deduction before making decisions on year-end spending on items that generate itemized deductions, such as charitable gifts or elective health care procedures. If you do not itemize, you will not receive any additional tax deductions for these items. If you are close to the standard deduction, you may want to consider shifting deductions and combining them into one tax year. For example, if you plan to take the standard deduction in 2018, move 2018 year-end charitable gifts to early 2019. By making your 2018 and 2019 charitable gifts in 2019, you may now be able to itemize your deductions in 2019. The same planning should be considered for tax payments (state ES payments and property taxes), assuming you are under the $10,000 threshold, as well as elective health care procedures and other deductible expenses.

Accelerate Medical Expenses

This year is the last year for the lower threshold for medical expenses. For 2018, the Tax Act reduced the floor (from 10% to 7.5% of adjusted gross income) that must be exceeded to take a deduction for medical expenses on your tax return.  If you are itemizing and are close or know of upcoming medical procedures, you may want to consider accelerating any medical transactions and purchases into the 2018 tax year.

Donate Appreciated Securities to Charity

If you’ve already planned charitable contributions, donating appreciated securities — instead of cash — provides double the benefit. When donating stock with long-term capital gains, you get the full charitable deduction and avoid realizing capital gains on the stock appreciation. The cash you were going to donate can now be used to re-purchase the security donated, which re-sets your cost basis. You can’t get much better than that!

Maximize your Retirement Vehicles

Establish and fund qualified plan contributions. You can make contributions to your 401(k) up to $18,500 generally and $24,500 if you are over age 50.

Qualified Charitable Distributions from IRA RMD

Once you hit age 70½, a taxpayer must make required minimum distributions (RMDs) out of their IRAs (and other retirement plans). Distributions are taxed at ordinary income tax rates. Rather than making a taxable distribution, the taxpayer can make a Qualified Charitable Distribution (QCD), which allows taxpayers to distribute up to $100k from an IRA directly to a qualified charity. These distributions are excluded from income but count towards satisfying your annual RMD requirements. Since the distributions are excluded from income, you cannot claim a charitable deduction.

If you were already planning on making a charitable gift, this could be a great tax planning strategy. This strategy works well if you do not need the cash from the RMD. If you do need the cash from your RMD for cash flow purposes, this strategy may not be as tax-efficient as gifting low basis securities, but it does not meet multiple criteria.

Paying Estimated Taxes from IRA RMD

Some taxpayers struggle to remember to pay quarterly taxes. A lesser-known tax strategy is to have all of the RMD go to federal and state estimated taxes at year-end. The IRS deems this payment as if it was made throughout the year; therefore, avoiding an underpayment penalty. So, if your RMD is approximately your estimated tax payments, you could get extra deferral in your portfolio and not make your quarterly tax payment until December. This strategy won’t work for this year, but you could explore with your tax preparer and Versant advisor for next year.

Harvest Capital Losses (or Gains)

It is never fun when the stock market goes down, but there is a small silver lining – harvesting capital losses. Tax loss harvesting is the practice of selling a security that has experienced a loss and replacing it with a similar security to maintain your market exposure. This loss now becomes an asset that can be used to offset current or future gains in the portfolio. Versant continuously monitors opportunities to harvest losses.

Conversely, taxpayers in the lowest tax brackets should consider harvesting long-term capital gains because they may be eligible for the 0% long-term capital gains rate (based on federal taxable income). As a result, you can sell the security and immediately repurchase it to maintain your market exposure. You have now reset your cost basis without triggering any taxable gains!

Utilize State Charitable Tax Credits

To promote social welfare, many states offer tax benefits for contributions to areas such as education, low-income residents, chronically ill or disabled children, foster children, and the military. Arizona has several tax credits of which to take advantage.

*Note, you will no longer be able to take a Federal charitable deduction after August 26, 2018 for the gift if you take the credit, although Arizona will still allow you to offset your tax liability dollar-for-dollar up to the maximum contribution limits (the amount varies per tax credit and filing status). A list of Arizona’s tax credits and the qualifying charitable organizations can be found here. Contributions can be made through April 15th of the following tax year.

Annual Exclusion and other Gifts

You can make gifts up to $15,000 per individual or $30,000 for married couples to any family member or friend that you wish to gift to. You can make gifts into trusts for children or grandchildren. You can contribute to Internal Revenue Code Section 529 plans, which grows free of income tax. You can gift up to $5,500 to either a traditional or Roth IRA on behalf of others, as long as they have the earned income to qualify and have not already funded their own IRAs. In addition, you can also make unlimited gifts directly to educational institutions and medical facilities.

Distribute Income from Trust and Estate Accounts

Estates and trusts are taxed at the highest income tax rate and a lower threshold at which the 3.8 percent Medicare surtax applies. Therefore, it likely makes sense to distribute income to the beneficiaries to be taxed at their lower income tax rate.

Mortgage Deductions & Refinancing

Most home equity lines and second mortgages are now deductible. If you borrowed money to build, buy or substantially improve the home that secures your loan, the interest should be deductible.

The TCJA reduced the limit on home acquisition debt to $750,000 after December 31, 2017. Old debt is grandfathered to the $1 million limit.

New Kiddie Tax Rules

As a result of the new Tax Act, children’s income will be taxed at the rates that are applicable to trusts and estates, rather than at the parent’s top marginal rate. The top income tax rate starts sooner and is at the top bracket. Children will need to file separate returns if their earned income exceeds $12,000 or unearned income (interest, dividends, capital gains) exceed $1,050 or if they have a mix of both earned and unearned income, they must file if the total exceeds the larger of $1,050 or earned income plus $350.

These are just a few examples of year-end tax planning strategies to consider. So, before the ball drops on New Year’s Eve, please take a few minutes to reminisce on your 2018 tax situation and consider available tax planning strategies. Your Versant team is here to assist with this process. What better way to ring in the New Year, than with the gift of a lower tax liability!

Erin Itkoe, CFP®, CPA®/PFS

Director of Client Experience & Senior Wealth Counselor

Erin provides comprehensive wealth management solutions to a range of Versant Capital Management’s clients. She also ensures that every client has a consistent and positive experience working with the firm and its advisors.

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