2018 Year-end tax planning strategies

Moves to help control your destiny

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Cheryl L. Dickerson, CPA

The pumpkin spice latte has been around for months. 110-degree days are almost a forgotten memory and the focus is on the holidays. All these signs mean one thing for us CPAs – it’s time to do 2018 tax planning. The reality is – tax planning should be an ongoing activity throughout the year. While the end of the year may be around the corner, there are still things you should consider. The filing of 2018 returns will be the maiden voyage for a number of the Tax Cuts and Jobs Act’s provisions. We heard a lot about them when the 2017 returns were being filed, but this is the year we’ll see them in action. Some of these changes may impact how you approach year-end tax planning.

Itemized deductions

You may have been used to itemizing your deductions when you filed your income tax return. In 2018, due to an increased standard deduction, you may find that it gives you a larger tax benefit, so the race to formalize your itemized deductions may be a moot point.

In 2018, the standard deduction for a single filer is $12,000 and married filing jointly $24,000. A good starting point is to review your 2017 itemized deductions and how provisions of the Tax Cuts and Jobs Act (TCJA) may change those.

The TCJA caps the deduction for taxes at $10,000. This includes your state income tax or state sales tax, real estate tax and personal property tax. You may have felt a need to make your state income tax payment prior to year-end. If your taxes exceed the $10,000 limit, there will be no additional benefit to doing this.

If it appears the standard deduction is going to provide you the larger benefit, consider bunching your charitable contributions. Many of us make a good deal of our donations towards year-end. If you are prevented from itemizing due to the higher standard deduction, contributing in alternating years may push your itemized deductions above the limit, providing you with additional tax benefits.

Don’t miss: charitable giving strategies with the new tax law

Home mortgage and home equity debt

I’ve seen a great deal of information and misinformation regarding the deduction for home mortgage interest and home equity interest. The interest on your home mortgage is still deductible. There are new limits on the debt ceiling for the interest deduction. For acquisition indebtedness after December 14, 2017, the limit is $750,000. Before tax reform, the acquisition indebtedness limit was $1,100,000.

Home equity interest remains deductible if the proceeds were used to acquire or substantially improve the home that secures the loan. If you have home equity debt, you will need to determine the amount used for the acquisition or improvements. Now is a good time to assemble the information that you’ll need to figure this out.

The significance of the interest deduction for home mortgage debt is dependent upon the itemized versus standard deduction and how it relates to your personal situation.

529 Plans

Most tax planning revolves around how to get a tax deduction. Contributions to a 529 plan – a qualified tuition plan –do not provide a federal tax deduction; however, they are a great way to plan for the cost of paying for college. The TCJA expanded the opportunities to use 529 plans to pay for tuition.

In the past, the earnings could be withdrawn tax-free if the funds were used to pay for qualified higher education expenses at eligible educational institutions. Plans can now be used to pay for tuition up to $10,000 per year at elementary, secondary public, private or religious schools. The change presents a financial planning opportunity for parents or grandparents paying the tuition for students attending elementary or secondary schools.

1099 Reporting

If in your trade or business, you have made payments in excess of $600 for services to someone who is not your employee – i.e. an independent contractor – you may have an obligation to file a 1099-MISC. There are significant penalties that apply if you were required to file a 1099 MISC and did not comply. Now is a good time to obtain the information from the payee to prepare the 1099. You’ll need the name, address and taxpayer identification number/Social Security number. The 1099 is required to be filed by the end of January. If you have any questions as to whether you will be required to file a 1099, contact your accountant.

Qualified business income deduction

If you operate your business as a sole proprietorship, or have an interest in a partnership, LLC or S Corporation, you may realize a new deduction identified as Section 199A, or the qualified business income deduction. As a general concept, these entities may realize a 20% deduction of their qualified business income. This is perhaps one of the biggest changes that resulted from the TCJA. It’s subject to numerous rules and limitations and is about as far from simplicity as it could be. There are strategies that may be employed to maximize the deduction. Contacting your tax professional is a must.

Learn more about the qualified business income deduction

Review your investments

The TCJA has changed numerous items, but many of the same tax planning moves still apply. Review your investment portfolio. If you have realized capital gains you may wish to sell some of your losing investments prior to year-end. If you’ve sold depreciable real estate, a consultation with your CPA can help provide you with an approximation of what the tax implications of that sale may be. I’ve found a number of clients are unprepared for the impact the depreciation deductions from prior years have on a current sale. I always stress a consultation in advance of the sale, but in any event, it’s better to be prepared now than to be surprised in April.

Asset acquisitions

If you have a trade or business and have been contemplating the purchase of an asset, making that purchase prior to year-end can provide you with a tax benefit. The Tax Cuts and Jobs Act increased bonus depreciation to 100% and expanded the definition of qualified property to include used property. The TCJA also increased the dollar limit of Section 179 and expanded the category of assets eligible for Section 179. As with every purchase, it should make economic sense and not solely be a tax motivated purchase.

Withholding

You’ve probably noticed that your income tax withholding changed early into the year as a result of the new tax rates implemented by the TCJA. Now is a good time to review your withholding and potential tax liability to align the two. You may have the opportunity to revise your withholding for the remainder of the year if needed.

Again, my message to you is – it is better to be prepared for April than be stunned by the results.

Cheryl L. Dickerson, CPA, specializes in the preparation, review, planning and research for both individual and business tax returns. She can be reached at (480) 483-1170 or CherylD@hhcpa.com.