As another year is drawing to a close and tax season is just around the corner, Gift CPAs would like to share the following information and list of tax tips with you to help with year-end tax planning.
Consider investing in an IRA. You have until April 15, 2019 to make the payment. The 2018 limit for IRA contributions is $5,500 with an additional $1,000 allowed for taxpayers over 50 years of age by 12/31/2018. If your income is too high to make a Roth IRA contribution, you may consider making a Traditional IRA contribution and using the “back door” re-characterization rules to get money into your Roth IRA.
Health Savings Account
The limit for 2018 is $3,450 for an individual and $6,900 for a family. There is an additional $1,000 allowed for taxpayers 55 or older by 12/31/2018. Look at maximizing the contributions if you haven’t already done so.
Capital gains and losses
If you have realized capital gains during the year, look to see if you have any unrealized losses that can be converted into realized losses to offset the gains. If you have unused capital losses being carried forward, look to see if you have any unrealized gains that could be realized and used against the losses. Remember to always try to hold investments for at least one year and a day. This allows favorable capital gain treatment as opposed to having your gains taxed as ordinary income.
Required Minimum Distributions
If you are over 70 ½, make sure that you take your required minimum distribution from your IRA. The penalties for not taking the required distributions are severe. You also have the ability to make an IRA distribution directly to a charity. This will satisfy your required minimum distribution without having to realize income in that year up to the amount that was given to charity.
The 2018 gift tax exclusion is $15,000 per individual. Remember that you do not get a tax deduction for the amount of the gift, but it could help you with estate taxes in the future.
Big Tax Changes for 2018:
Earlier this year Congress passed and the President signed the largest tax legislation bill since 1986. This bill dropped the corporate tax rate to a flat rate of 21% and as a result billions of dollars were moved back into the US economy. The legislation also created a new tax deduction for small businesses. The Qualified Business Income Tax Deduction lets business owners deduct 20% of their profits before paying tax at the higher individual income tax rates. There are lots of exclusions and complexities to the 20% deduction in the new law which we will help you to navigate this year and into the coming years. As with any tax legislation there are lots of other things thrown in to help pay for the big changes.
Changes Affecting Individuals:
- State and local income tax, sales tax and property tax are capped at $10,000 for both Married and Single filers, ($5,000 for Married filing separately).
- The loan ceiling for deductible home mortgage interest drops from $1,000,000 to $750,000. Existing home loans are grandfathered in.
- Interest on home equity loans is no longer deductible – some exceptions do apply
- Expenses related to any job where you receive a W-2 are no longer deductible. This hits employees like sales people and union workers that had to travel a lot to various temporary jobsites harder than others. You should discuss the possibility of reimbursement of these expenses with your employer.
- The standard deduction rose to $24,000 for those filing married and $12,000 filing single. At this higher level many will find the standard deduction is higher than the taxes, interest, charity, and work related expense they had in previous years when they were able to itemize.
- There is no longer a deduction for a dependent. This will hit larger families the hardest. However, the child tax credit increased from $1,000 to $2,000 per child to help offset the loss of a dependent. The income level at which you start to lose the child tax credit has increased to $200,000 for individuals and $400,000 for joint returns. There is also a new $500 credit for non-child dependents.
- Deduction for investment fees and tax preparation cost are no longer deductible for an individual. Tax preparation fees related to a business are still deductible.
- Alimony paid under a divorce decree filed after 2018 is not deductible by the person paying alimony and not taxable to the recipient. Divorce decrees prior to that continue to be taxed under the old law.
- Medical expenses are still deductible but only the amount that exceeds 7.5% of your income and only if you are itemizing.
- Starting in 2019 the individual mandate that requires everyone to have health insurance goes away but for 2018 the old law is still in effect and you may pay a penalty if you do not have “minimum essential coverage”.
- The deduction for tuition and fees is eliminated but the tuition tax credit remains so you may still be able to benefit from higher education costs.
Changes Affecting Businesses:
- Like kind exchanges are changing. You can still trade real estate for real estate and defer the tax on the gain. However, when you trade equipment you now have to treat it as two transactions. You will now report a sale with a possible gain including depreciation recapture and a purchase with full depreciation deduction.
- Business losses are capped in any one year. Losses in excess of $500,000 on a married return and $250,000 on a single return must be carried forward.
- The 9% domestic production deduction is gone and replaced by the new QBI deduction above.
- The business meals and entertainment deduction has been changed to just meals. Business entertainment is no longer deductible. Holiday parties still qualify!