The Tax Cuts and Jobs Act (TCJA) created more than 100 new tax provisions — a staggering thought as people begin to prepare for the next filing season. The good news is that these, and some of the surviving provisions, create a wealth of year-end planning opportunities.
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Choose the Right Approach to Deductions Many taxpayers who’ve traditionally itemized their deductions might end up simply claiming the standard deduction for 2018. The TCJA roughly doubles the standard deduction to $12,000 for single filers and $24,000 for married couples. It also suspends personal exemptions and eliminates or limits many of the popular itemized deductions.
The deduction for state and local income and sales taxes, for example, is limited to $10,000 for the aggregate of state and local property taxes and income or sales taxes. This could make it difficult to claim enough in itemized deductions to surpass the standard deduction.
The choice between taking the standard deduction or itemizing will depend on your individual circumstances. Factors such as the amount of medical expenses could also play a role in the decision.
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Time Those Big Medical Expenses if You Can The TCJA gives taxpayers with substantial upcoming medical expenses strong incentive to incur them this year. The law lowered the threshold for deducting unreimbursed medical expenses from 10 percent of adjusted gross income (AGI) to 7.5 percent for all taxpayers in 2017 and 2018. Next year, though, the threshold returns to 10 percent, making it harder to qualify for the deduction.
Qualified medical expenses are broadly defined as the costs of diagnosis, cure, mitigation, treatment or prevention of disease and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists and other medical practitioners, as well as equipment (including eyeglasses, contact lenses and hearing aids), supplies, diagnostic devices and prescription drugs. Travel expenses related to medical care are also deductible.
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Offset Capital Gains The strategy of “loss harvesting” to shield gains from the capital gains tax remains advisable for 2018, particularly for high-income taxpayers. It involves selling underperforming investments to realize losses that can offset taxable gains realized during the year. As a bonus, if the losses exceed gains, up to $3,000 of the excess losses generally can be used to offset ordinary income, which is taxed at a higher rate than capital gains. Any excess is carried forward.
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Bunch Charitable Contributions You can claim deductions for charitable contributions only if you itemize. For that reason, it’s been estimated that the number of households claiming charitable deductions will decline under the new tax law. But those with philanthropic inclinations can reap tax benefits by donating strategically.
For example, if you contribute to a donor-advised fund (DAF), you can get an immediate tax deduction. By making multiple contributions to a DAF in a single year, you can get past the standard deduction threshold and take an itemized deduction. You can direct the fund administrator to distribute the funds annually in equal increments, so your favorite charities receive a steady stream of donations regardless of whether you itemize every year. Contributing appreciated assets to a DAF (or directly to a charity) can help avoid long-term capital gains taxes (subject to certain limitations) in addition to securing a deduction for the assets’ fair market value.
If you’re not using a DAF, you can take a similar “bunching” approach to your donations to accumulate enough charitable itemized deductions to push them over the standard deduction for some years. For example, if you typically contribute to a nonprofit at the end of the year, you can instead bunch donations in alternative years (January and December of 2019 and January and December of 2021). Or you can make several years’ worth of donations in one year. You give the same aggregate amounts as in the past and preserve the charitable deduction.
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Contribute to Retirement Accounts As in previous years, you can shrink your taxes by adding to tax-deferred retirement accounts. Consider the benefit of making allowable contributions to your IRAs and 401(k) plans. Also, keep in mind that because the deadline for certain retirement account contributions is after the end of the year, there may be an opportunity for tax planning into the new year.
Hannis T. Bourgeois is a premier certified public accounting and consulting firm serving the Baton Rouge, New Orleans and Denham Springs markets. The firm works with high net-worth individuals and privately held and SEC-registered companies across the state providing accounting, tax, audit and consulting services. For more information, visit HTBCPA.com.
