As we near the end of year here are a few last-minute tax saving tips:
- Do you think you’re going to owe federal income tax for the year? Increase your tax withholding, especially if you think you may be subject to an estimated tax penalty. Steps to take: ask your employer to increase your withholding for the remainder of the year to cover any possible shortfall. This strategy can also be used to make up for low or missing quarterly estimated tax payments. With all the recent tax changes, it may be especially important to review your withholding in 2018.
- Are you 70 ½? – at this age you are generally required to start taking a required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans. Take any distributions by the date required. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
- Have you maxed out your Retirement savings for the year? For 2018, you can contribute up to $18,500 to a 401(k) plan ($24,500 if you’re age 50 or older) and up to $5,500 to a traditional or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2018 contributions to an employer plan generally closes at the end of the year, while most IRA’s allow you until the due date of your federal income tax return (not including extensions) to make 2018 IRA contributions. Why should you do this? Because maxing out your contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2018 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.
- Need help? Call us! – There’s a lot to think about when it comes to tax planning. It only makes sense to talk to a tax professional who can evaluate your situation and help you determine if any year-end moves make sense for you.
The capital gains rates have changed in 2018 for the first time in a long time. Rates have been lowered and there are plenty of ways to avoid paying this tax!
First let’s take a quick look at the new rates because I many of you will find them even lower than in recent years!
- 0% applies to married filing joint (MFJ) taxpayers with income up to $77,200. If you are single, the earnings limitation is $38,600.
- 15% for MFJ taxpayers with income between $77,201 – $479,000. Single income is $38,601 – $425,800.
- 20% applies to MFJ incomes in excess of $479,000 and singles in excess of $425,800.
- Additional 3.8% – the net investment tax is added to the above for couples with income over $250,000 and single filers over $200,000.
This effectively means a married couple can have total income of $101,200 after considering the $24,000 standard deduction and still qualify for a 0% capital gains rate!
Next we want to review some tax tips to take advantage of these new rates:
- Sell and Increase Basis – Consider taking advantage of the new capital gains rates by selling enough stocks to still apply for the 0% rate and then reinvest in the same stocks to obtain an increased basis.
- Gift Appreciated Stock to Your Family – Give up to $15,000 to your children or grandchildren. This will result in them taking your lower basis but when then sell the stock they most likely qualify for the 0% capital gain tax rate.
- Pay for Family Member’s College – fund a 529 plan with stocks and they not only grow tax-free but any withdrawals use for education expenses avoid capital gains.
- Fund Your Retirement Healthcare Expenses – Contributions to a health savings account fur future expenses result in tax-free growth and avoid capital gains when withdrawn to pay for medical expenses.
- Give to Charity – Donate appreciated securities to a donor-advised fund to get the tax deduction for the fair market value of the stock and pay no capital gains tax.
- Buy a New Home – Exclusion of capital gains of $500,000 MFJ and $250,000 for others still apply for you or primary residence.
- 1031 Exchange – Use this strategy to defer capital gains for real estate assets. Other uses have been eliminated in 2018.
- Die – Ok admittedly this does not sound like a great option but any securities held until you die are passed on to your heirs at the current fair market value and no capital gains tax is avoided.
The Tax Cuts and Jobs Act gave breaks to many, but those that itemized deductions will be surprised to find out that a lot of things they have been used to deducting are no longer allowed in 2018 and that might result in a tax sticker shock when their returns are prepared.
Here are a few of the gone but not forgotten:
- Moving expenses – this used to be able to be deducted even if you did not itemize.
- Personal exemptions – in the past you could deduct $4,050 per family member.
- Home equity loan interest – this is not longer allowed for new home equity loans and the total amount of home debt now cannot exceed $750,000.
- Casualty and theft losses – this is now limited to property damaged in disaster areas declared by the President.
- Charitable contributions – this has been tightened to eliminate the value of athletic tickets received for your donation, In the past this was not required.
- Job expenses – unreimbursed work expenses are no longer allowed.
- Tax preparation fees – these have been eliminated as well as tax software and preparation subscriptions and books.
- Investment advisory fees – many taxpayers who were previously able to deduct these as well as IRA fees and investment books and subscriptions are no longer able to deduct these costs.
The IRS has recently issued 184 pages of proposed regulations to clarify this deduction passed as part of last year’s major tax act. Here are some of the highlights:
The deduction is for businesses organized as sole proprietors, partnerships, LLC’s, S corporations, and some trusts. It allows a deduction for 20% of “qualified business income” which means net income from a trade or business before owner compensation. Essentially, it excludes business interest, dividends, and capital gains and losses.
There are two limitations for high income taxpayers. One is based on what you do and the other is based on W-2 wages paid.
The first limitation phases out for taxpayers with income in excess of $315,000 for joint returns and $157,500 for all others. The deduction becomes zero when taxable income reaches $415,000 and $207,500. It applies to the following service businesses – accounting, actuarial science, athletics, brokerage, consulting, financial, health, investment management, law, performing arts, and securities trading and dealing. Specifically excluded are real estate brokers and insurance agents.
The second limitation is incredibly complex and applies to all taxpayers, not just those specified above. The sum of (1) W-2 wages paid by the business (excluding the owner) and (2) the non-depreciated portion of tangible depreciable property used in the business is compared to the 20% deduction and the lesser of the two amounts becomes the amount deductible.
Everyone has probably already heard complaints about the new tax law’s effect on charitable deductions. Experts agree that higher standard deduction in 2018 will result in millions of taxpayers who will no longer find it advantageous to itemize deductions (charitable or other types) on their federal tax returns. For those who will still itemize, lower tax rates mean deductions carry less value. In 2018, the standard deduction will almost double to $12,000 for single filers and $24,000 for joint filers. Because some popular deductions were reduced or capped (think state and local taxes as well as home mortgage interest), many folks will find their total allowable itemized deductions will come in lower than the standard deduction. What does that mean for those who will no longer realize any tax benefit from itemizing charitable deductions? And what changes affect those who still should itemize their charitable donations in 2018?
What do you want first? The good news or the not-so-good news?
It’s short so here is the good news first: charitable donations remain deductible under the Tax Cuts and Jobs Act. The rules are largely the same with only a few changes.
- Charitable cash donation limit increased. The percentage limit for charitable cash donations by an individual taxpayer to public charities and certain other organizations increases from 50% to 60% of their adjusted gross income (AGI). See Line 37 on IRS Form 1040.
That about does it for the good news. Now the not-so-good news:
- Deductions for Certain Payments to College Athletics. Taxpayers can no longer deduct payments made to a college or college athletic department (or similar) in exchange for athletic event tickets or seating rights at a college stadium.
- Charitable Standard Mileage Rate Frozen. The charitable standard mileage rate will no longer be adjusted for inflation. So for 2018, the rate remains a lousy 14 cents per mile. As in previous years, if a taxpayer itemizes, they can still deduct the costs of gas and oil directly related to getting to and from the place where they volunteer. As an alternative to making those calculations and keeping those records, they have the option to instead deduct 14 cents for each mile traveled using a personal vehicle. That rate, however, compares unfavorably to the IRS standard mileage rate of 54.5 cents per business mile and 18 cents for medical and moving deductions. These rates each increased one cent over 2017 rates as a result of inflation.
Why a little tax planning is now more important than ever
If you have benefited from itemizing charitable contributions in previous years and are worried about how the changes might impact you in 2018, don’t panic just yet. There is a bit more good news. Doing a bit of advanced planning with a tax professional will still allow you to realize significant tax savings from your charitable giving. This is because the Tax Cut and Jobs Act did not change some of the biggest (but lesser known) tax advantages for charitable donations. These include:
- Donations of appreciated stocks or bonds. By donating appreciated stocks or bonds, rather than cash, one still avoids capital gains taxes regardless of whether or not a donor itemizes. If a donor doesn’t want to change their current investments, they just utilize the cash they planned to donate to buy the same bonds or stocks to replace those donated. The new or replacement assets would then have 100 percent basis, which in the simplest terms means no capital gains taxes are due on any past increase in the value of donated assets. This creates a “win-win” for both the donor and charity as it eliminates any taxes that might be due while increasing the amount available for charity by as much as 20 percent.
- Using donor-advised funds. Donor-advised funds were also unaffected by the Tax Cuts and Jobs Act. Per Wikipedia, a donor-advised fund is “a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals.” These funds allow givers to deposit dollars into them in one year, but then spread out gifts to charities they designate over a period of several years. This is an effective strategy for individuals who may wish to itemize deductions the first year (the year they contribute to the fund), but may instead want to take the standard deduction in the second or future years.
- Qualified charitable distributions. Donors that are 70 ½ years of age or older can continue to donate to a charity directly from an IRA. Known as a “qualified charitable distribution”, this method of giving is better than a deduction because the income is never reported to the IRS and the gift counts towards the required minimum distribution the donor must withdraw each year. The tax savings is not contingent on whether or not the donor is itemizing deductions on their federal return; it remains the same either way.
Have questions about the 2018 changes? Need to talk to a tax professional about your charitable giving plans or developing your tax strategy? Please feel free to contact us today to schedule your appointment.
Overview of New Home Mortgage Deductions
Congress passed the new tax bill at the end of last year. What does it mean for homeowners? How do the changes affect mortgage interest deductions on your 2018 forms?
Part of the goal was to simplify the massive tax code and make it easier to file. Whether it will prove easier or not, allowing Americans to use the standard deduction instead of itemizing is one big change.
The new law nearly doubles the standard deduction to $12,000 (from $6,350) for single filers and $24,000 for married couples (from $12,700) . That means a lot of people who previously filed itemized forms will be able to file the standard deduction. The law caps mortgage interest deduction at $750,000 on new homes (purchased after December 15, 2017). This will primarily affect expensive real estate markets in coastal areas like New York and California. It might also freeze new home purchases at the upper end since the tax bill will be higher.
Also, home equity loans are no longer deductible under the new law unless they are used to improve the home. Additions and upgrades count, money to pay off other debts does not. The previous tax law had no requirement.
Mortgage rates have risen slowly all year but they are still historically low at around 4%. New home buyers should consider buying soon to prevent paying higher rates later. Rising interest rates affect a buyer’s purchasing power. An increase of just 1% decreases the purchasing power by 10%.
Some housing experts predict an increase in rates over the next few years. Most people won’t see their tax obligation change significantly but the housing market may be getting more expensive.
Our experts would be happy to help with any mortgage interest questions or general tax information you might have.
The medical expense tax deduction is one of the only retroactive potential tax benefits from the new tax bill. If you itemize your deductions and experienced significant unreimbursed medical costs during 2017 the new lower threshold limit of 7.5% of adjusted gross income may be of benefit to you.
Prior to the passage of the Tax Cut and Jobs Act in December 2017, only qualified medical expenses in excess of 10% of adjusted gross income were eligible for itemized deduction. With the new expansion of the medical expenses deduction, the threshold has been reduced from 10% to 7.5%.
For example, if your adjusted gross income for 2017 is $75,000, the first $5,625 of medical expenses would not be deductible under the new rules. If you incurred $10,000 in medical expenses during the year, you would now be able to deduct $4375, a $1875 bigger deduction than previously.
It’s important to note, this reduced threshold is good only for the 2017 and 2018 tax years. Beginning with January 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income.
So what does this mean? If you think you’re likely to itemize deductions and had quite a few medical and/or dental expenses during the 2017 year, for yourself, spouse, and dependents, add up those receipts.
Include unreimbursed prescription costs, durable medical equipment such as crutches, orthodontia, contact lenses or glasses, and any other medical expenses not covered by your insurance or reimbursed elsewhere. The IRS maintains a list of qualified expenses in publication 502 beginning on page 5 if you aren’t sure what to include.
If your total is greater than 7.5% of your adjusted gross income, you can likely reduce your taxes owed with this deduction. Consult your tax professional with any questions or to help you accurately determine the medical expenses deduction for you.