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December 2018 Tax Reform and Year End Planning

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The recent tax reform, officially known as the Tax Cuts and Jobs Act (TCJA) of 2017, was the biggest change in the tax code in over 30 years. The overhaul covered both individual and corporate income taxes. Most will see their tax bill decline when they file, but a few folks may see a sharper bite.

Let’s touch on some of the changes at a high level.

 Tax brackets and tax rates have changed. The lowest bracket holds at 10% but the top bracket has been lowered from 39.6% to 37%. There have also been modest adjustments to the rates and income levels for taxable income.

Single filers 2018

 

Single filers 2017

Taxable income

Rate

Taxable Income

Rate

$0 – $9,525

10%

$0 – $9,325

10%

$9,526 – $38,700

12%

$9,326 – $37,950

15%

$38,701 – $82,500

22%

$37,951 – $91,900

25%

$82,501 – $157,500

24%

$91,901 – $191,650

28%

$157,501 – $200,000

32%

$191,651 – $416,700

33%

$200,001 – $500,000

35%

$416,701 – $418,400

35%

$500,001 or more

37%

$418,401 or more

39.6%

 

Married filing jointly 2018*

 

Married filing jointly 2017

Taxable income

Rate

Taxable Income

Rate

$0 – $19,050

10%

$0 – $18,650

10%

$19,051 – $77,400

12%

$18,651 – $75,900

15%

$77,401 – $165,000

22%

$75,901 – $153,100

25%

$165,001 – $315,000

24%

$153,101 – $233,350

28%

$315,001 – $400,000

32%

$233,351 – $416,700

33%

$400,001 – $600,000

35%

$416,701 – $470,700

35%

$600,001 or more

37%

$470,701 or more

39.6%

*or Qualifying Widow(er)

Source: IRS US Tax Center 2017/18 Federal Tax Rates, Personal Exemptions, and Standard Deductions

The personal exemption has been eliminated; child tax credit increased. The $4,050 personal exemption taken in 2017 has been eliminated. However, the child tax credit doubles to $2,000 per qualifying child, subject to income limitations.

The increase in the standard deduction will simplify filing for some taxpayers. The standard deduction will rise from $6,350 to $12,000 for single filers and $12,700 to $24,000 for joint filers.

The higher standard deduction and increased child tax credit will likely lower tax bills for many lower and middle-income filers. In addition, it simplifies the filing process.

Some itemized deductions have been reduced or eliminated. State and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above can no longer be written off against income.

All miscellaneous itemized deductions are eliminated, including deductions for unreimbursed employee expenses, tax preparation fees, the deduction for theft, and personal casualty losses, although certain casualty losses in federally declared disaster areas may still be claimed.

The new tax law enhanced the deduction for charitable contributions by raising it to 60% of adjusted gross income from 50%.

The law preserved the deduction for unreimbursed medical expenses, temporarily reducing the limitation from 10% to 7.5% of adjusted gross income for tax year 2018 and retroactively for 2017. The floor returns to 10% in 2019.

Changes to the AMT–the alternative minimum tax. The dreaded AMT is still with us but will snag far fewer taxpayers since the exemption and exemption phase-out have been substantially increased.

About 5 million taxpayers were expected to pay the AMT under the old law, but only 200,000 are expected to pay the AMT this year.

There’s a new 20% deduction for business owners. The new law gives “pass-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.

 It’s a substantial benefit to business owners who aren’t classified as C-corps and wouldn’t benefit from the reduction in the corporate tax rate to 21% from 35%.

The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.

There are limitations to the new deduction and some aspects are complex. It is important to check with your tax advisor to see how you may qualify.

Year-End Financial Planning Moves

1. Review your income or portfolio strategy

Has there been a change in your circumstances that may impact your investment strategy, such as early retirement or the sale of a business? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your investment approach.

2. Mind the tax loss deadline

You have until Monday, December 31 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.

3. Mutual funds and taxable distributions—be careful

If you buy a mutual fund on December 18th and it pays a dividend and capital gain December 21, you will be responsible for paying taxes on the entire yearly distribution, even though you held the fund for just three days. It’s a tax sting that’s best avoided because the net asset value hasn’t changed.

4. Don't miss the RMD deadline

Required minimum distributions (RMDs) are minimum amounts a retirement plan account owner must withdraw annually, generally starting with the year that he or she reaches 70½ years of age. Some plans may provide exceptions if you are still working.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.

The RMD rules apply to traditional IRAs, SEP IRAs. Simple IRAs, 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans. They do not apply to ROTH IRAs.

It’s important that you don’t miss the deadline.  If you do the penalties are steep!

5. Contribute to a Roth IRA or traditional IRA

 A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax-free withdrawals if certain requirements are met.

You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. Total contributions for both accounts cannot exceed the prescribed limit.

There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older. In 2019, limits will rise to $6,000 and $7000, respectively.

You can make 2018 IRA contributions until April 15, 2018 (Note: state holidays can impact final date).

6. Wrap up charitable giving

Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. 

Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70½ years old? A QCD is an otherwise taxable distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity.

This becomes even more valuable considering tax reform as more taxpayers will no longer be able to itemize, and an RMD that is taken, then donated to a charity, may not provide tax benefits.

You might also consider a donor-advised fund. Once the donation is made, you can generally realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.

If you have any questions or would like to discuss any matters, please feel free to give us a call. 

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