Year End Tax Planning Strategies
With another year coming to a close it’s time to evaluate and implement year-end tax planning strategies. Due to the changes brought about by the Tax Cuts and Jobs Act (TCJA) there will be some new wrinkles to consider as well as the tried and true strategies. With the standard deduction rate nearly doubling and with some itemized deductions such as state and local taxes, being limited, itemizing your deductions this year may not be as likely. We are going to identify a couple of new and old year-end tax strategies to consider that could potentially ease your tax burden and give you a better understanding of how the new laws will affect your tax situation.
Long-Term Capital Gains
This is a very simple yet effective strategy that can generate significant tax savings. Long-term capital gains, which are primarily securities such as stocks, bonds, and real estate that are held for more than a year, are federally taxed at 0% if you are in the 12% marginal tax bracket or below. A married couple filing jointly with taxable income below $77,400 can generate long-term capital gains federally tax free until they eclipse the 12% marginal tax bracket. For example, a couple filing jointly who are projecting taxable income of $50,000 for the year can generate $27,400 of long-term capital gains federally tax free. Of course, as soon as taxable income exceeds the $77,400 threshold, any additional long-term capital gains will be taxed at 15%.
Convert or Invest in Roth IRAs
When calculating your taxable income for year end, you may find that you are going to be in a lower tax bracket than usual. If so, consider converting some of your retirement savings to Roth IRAs to take advantage of these lower rates so that more of your future retirement distributions will be tax free. Unlike traditional IRAs where your contributions are tax deductible for that year, Roth IRAs are not currently deductible when making the contribution. The advantages of a Roth IRA are that earnings the fund creates while your money matures is earned tax free and qualified distributions are never taxed. For more information on Roth vs. Traditional IRA, read our September 2018 Newsletter.
Take Advantage of Charitable Donation Deductions
With the standard deduction nearly doubling for most there will be a significant decrease in those who will itemize their deductions. If you are now going to use the standard deduction, the tax value for your charitable contributions will disappear. While it may not be feasible financially for many of you to increase the amount you already donate, there are a couple simple strategies surrounding charitable deductions you can implement to further decrease your taxable income. The first is bunching; instead of donating $5,000 to your favorite charity every year, consider bunching and donating $10,000 every other year. This way you can have $10,000 worth of charitable deductions for a single tax year, making it more likely that some of your charitable contributions will be tax deductible. A second, similar strategy is to set up a donor-advised fund. Donor-advised funds are set up for your charitable contributions to be made over time. For instance, you can put $20,000 into the fund and set it up so every year $5,000 is automatically withdrawn and donated to your favorite charity or charities. The advantage of the donor-advised fund is that the $20,000 contribution to the fund is immediately deductible for that tax year, even though the funds haven’t been donated yet. Both these strategies are extremely effective as they make more of your charitable contribution tax deductible. For more information about these strategies and additional strategies for those paying income taxes in the state of Colorado, read our July 2018 Newsletter.
In the past, medical deductions were only tax deductible if medical expenses exceeded 10% of your Adjusted Gross Income (AGI). Don’t forget that medical expenses also include dental, eye doctor, chiropractor, pediatrician, etc. Luckily, under the new tax laws the limit has been lowered to 7.5% of your AGI for 2018. For those whose expenses are not set to exceed the 7.5% AGI limit for 2018, consider bunching your medical expenses. This can easily be done by accelerating medical procedures and appointments into 2018 or deferring to 2019. For instance, if you have doctor and dental appointments planned for early 2019, see if you can get them in a little earlier before year end. This way your expenses can potentially exceed 7.5% of your AGI and you could see a deduction for the year. However, be sure you will actually be itemizing in 2018, otherwise the bunching will not be effective.
Qualified Business Income Deductions (For Business Owners Only)
One of the most impactful new tax laws enacted under the TCJA was a special 20% deduction allowed for certain flow-through entities such as S-Corporations, LLCs and partnerships, as well as sole proprietors and single member LLCs. Individuals with pass-through or Schedule C income and taxable income less than $315,000 automatically qualify to receive this deduction on the LESSER of their qualified business income (QBI) or taxable income. However, if your taxable income is above $315,000 you don’t automatically qualify. Don’t panic, you may still qualify but it is far more complicated with many nuances and is about as clear as mud. Due the extremely complex nature, we highly recommend meeting with our team or another CPA to determine how to make the most of this deduction under the new laws. For more detailed information on this topic, please read our March 2018 Newsletter.
These are just a few tax planning areas we discuss with our clients to get their taxes ready for the end of the year. Obviously everyone’s tax situation is very unique, so for more in-depth planning we highly advise setting up a tax planning meeting with your tax advisor. We are open for appointments and are currently taking new clients. If you would like to set up a meeting with us, visit our website or call our office at (970) 223-0792 to schedule.