Tax Planning Tips for Year-End After The Trump Tax Reform
According to accountingtoday.com, although the Tax Cuts and Jobs Act (TCJA) provisions have been available for evaluation close to a year, taxpayers have had far less time to consider proposed regulations established to interpret those provisions and are even still awaiting additional proposed regulations and any final regulations.
Suggestions have been made that the 2019 tax filing season could experience delays due to the inability of the IRS to process all changes in a timely manner. Despite many questions remaining, taxpayers should start thinking about taking advantage of the new provisions of the law before year-end.
Increased standard deduction and reduced itemized deductions
Many taxpayers are projected to be better off with the standard deduction than the itemized deductions moving forward. The standard deduction nearly doubled to $12,000 for single filers and $24,000 for joint filers. In addition, many common itemized deductions have been reduced or eliminated. These itemized deductions include the state and local tax deduction, the interest deduction, the casualty loss deduction and the miscellaneous itemized deductions over the 2-percent-of-adjusted-gross-income floor. About two-thirds of taxpayers already claimed the standard deduction in prior years. Predictions estimate that number will increase to more than three-fourths of all taxpayers. Many taxpayers may not receive a tax benefit from itemized deductions that they have received in the past.
To ensure the best outcome for taxpayers, they need to compare the new standard deduction to the amount of itemized deductions they were entitled to in the past. In addition, they should compare the amount of itemized deductions they expect to be entitled to in 2018 and moving forward from there.
Taxpayers that have regularly claimed itemized deductions in the past may want to consider the possibility of bunching those deductions into one year and claiming the standard deduction in the other year. Charitable contributions can easily be bunched as an itemized deduction. Taxpayers can make contributions to their favorite charities in January and December of the same year while skipping the following year or through the use of donor advised funds. The donation can then be claimed in one year while distributions to charities are spread over many years.
Taxpayers over the age of 70-1/2 can consider paying charitable contributions from an IRA if the standard deduction is now still a better option. This can offset minimum distributions that would have been taken as income.
Taxpayers may be able to claim at least a portion of interest paid as qualified mortgage interest with a line of credit if they can document the cost of home improvements associated with that interest.
Due to the $10,000 limit on the state and local tax deduction, those paying real estate taxes should identify the possibility of allocating those taxes to a business tax return. Even though some higher-tax states have enacted laws to help taxpayers preserve deductions through charitable contributions to state charities or through payroll deductions, it is not clear if those approaches will hold up to IRS attacks.
Because TCJA was enacted so late in 2017, the new 2018 withholding tables were not required to be put into effect until March 2018. This delay could create potential over-withholding consequences for some taxpayers.
The new withholding tables adjusted for lower tax rates, the elimination of exemptions and the increased standard deduction. However, the tables did not adjust for the loss of itemized deductions. Unless taxpayers have adjusted their estimated tax payments or withholding accordingly, they could experience a potential under-withholding in 2018.
To avoid over or under withholding, taxpayers should adjust estimated tax payments and withholding if necessary. Increasing withholding can provide a benefit as if it had been paid all year and increasing estimated tax payments late in the year can provide a benefit based on the date they were paid. Taxpayers should also consider adjusting their Form W-4s for the remainder of the year to compensate for any anticipated under-withholding.
The 20 percent deduction for pass-through businesses
Most pass-through business owners are aware of and thrilled regarding the new 20% deduction that is available to them. There still remains, however, many questions as to how a business can take full advantage of the deduction. Some of these questions range from qualifying activity for a trade or business, what business income is qualified, what are the W-2 wages of the business, and what property qualifies. In addition, business owners may also have questions related to aggregating or breaking up businesses.
Answers to the issues addressed above are unclear making tax decisions complicated. To develop the best strategy to maximize deductions, pass-through business owners need to work with trusted tax advisers. Business owners must also consider that the 20 percent deduction expires after 2025. This complicates tax planning and must be considered in relation to any restructuring.
Until some of these issues become clear, taxpayers can either do nothing until the answers come or be able to take steps for the remainder of the year, as advised by experts, to increase their 2018 deduction.
The new partnership audit rules
Every partnership needs to designate a partnership representative, opt out of the rules if they are a smaller partnership, or push out liability for audit adjustments according to the new partnership rules effective in 2018. Partnerships should make these decisions and take action as soon as possible to prevent IRS audits. Remember, the audit rules are designed to increase the amount of IRS audits of partnerships.
Child Tax Credit and Social Security numbers
If the new higher Child Tax Credit is claimed, TCJA requires each and every child to be assigned a Social Security Number. The Social Security Number must be issued to a U.S. citizen or authorize the individual to work in the U.S. for the refundable portion of the Child Tax Credit.
Taxpayer Identification Numbers (TIN) do not qualify for the Child Tax Credit, but a TIN is sufficient for the new $500 credit for a qualifying dependent. Social Security Numbers can be issued as late as the filing date for the tax return.
529 plans and ABLE accounts
Taxpayers should explore paying elementary and secondary tuition form 529 plans and new opportunities to increase funding of ABLE accounts through 529 plans or the beneficiary’s income. However, special needs trusts may be a more attractive alternative due to the fact that the funds in an ABLE account revert to the state when the beneficiary becomes deceased.
Do the usual
Taxpayers should take the same approach when dealing with the following year-end planning:
- Investment portfolios should be reviewed to realize gains and losses before year end. A $3,000 net capital loss that can be offset against more highly taxed ordinary income is ideal. Taxpayers should consider timing of offsetting capital losses through realizing capital losses or offsetting ordinary income that could be taxed as high as 37 percent through realizing capital losses.
- Take required minimum distributions if the taxpayer has reached the age of 70-1/2 prior to 2018. If the taxpayer is not required to make a minimum distribution, ensure they make maximum contributions to 401(k) and 529 plans.
- Taxpayers could be hit with a large Alternative Minimum Tax creating a large burden for the taxpayer if they have exercised incentive stock options during 2018. If the values have significantly declined, consider selling them before year-end.
Non-highly-compensated employees can make an election to defer tax on stock options for up to five years due to TCJA.
The IRS will continue to issue guidance regarding outstanding issues that have not been addressed yet. With the many changes that TCJA has created, there are a number of planning opportunities for 2018 tax returns.
To take full advantage of the provisions of the new law, taxpayers, along with their advisors should monitor developments as they occur and take action prior to year-end.
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