GETTING READY FOR TAX SEASON

Recent changes to deductions and tax rates should guide

planning for the rest of 2018.

The Tax Cuts and Jobs Act (TCJA) made a large number of changes that affect individuals, including new tax rates, new rules for the child tax credit (“kiddie tax”), new thresholds for various capital gain rates, an elimination of personal exemptions, and a much larger standard deduction.

Standard deduction

The TCJA increased the standard deduction to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. (Compared with $12,700/$9,350/$6,350 in 2017.)

But somewhat offsetting the increased standard deduction, the act repealed all personal exemptions, which last year were $4,050 per person (subject to phaseouts above certain AGI levels).

Clients should determine what their anticipated itemized deductions for the year will be to see whether they will exceed their standard deduction. Those whose current itemized deductions fall far short of the standard deduction may want to postpone deductible expenses until next year; those that are close to the standard deduction amount may want to move planned 2019 spending into 2018 to maximize 2018 itemized deductions. They can then take the standard deduction next year.

Itemized Deductions

Charitable Deduction

The TCJA increased the income-based percentage limit for charitable contributions of cash to public charities to 60%, but you can carry forward by up to five years any amount that exceeds 60%. Since charitable contributions are entirely at the client’s discretion, they present the best opportunity for 2018 tax planning on Schedule A, Itemized Deductions. What clients should try to avoid is “wasting” the charitable contribution’s deductibility in years when the client is taking the standard deduction.

One way to avoid this is to bunch charitable donations into specific years. To do this, clients can combine several years’ worth of expected future charitable contributions into a single year. The relatively large charitable contributions in that year will help the client’s itemized deductions exceed the standard deduction.

Then in the future years, when the client would otherwise have made those bunched donations, the client takes the standard deduction. The client may wish to donate to a donor-advised fund, which can then make donations to charities over the next few years.

Miscellaneous Itemized Deductions

A note about miscellaneous itemized deductions.  All miscellaneous itemized deductions subject to the 2%-of-AGI floor under prior law are unavailable in 2018 (and through 2025). These include a variety of expenses, including unreimbursed employee expenses, such as job travel and union dues, and tax preparation fees.

Child Tax Credit

The TCJA increased the amount of the child tax credit to $2,000 per qualifying child. Up to $1,400 of the credit amount is refundable. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. Also, the threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and to $200,000 for other taxpayers.

Year-End Gifts

Now is a good time to evaluate whether clients should be making year-end gifts. A year-end gift of appreciated property can move taxable gain to family members in a lower tax bracket. Also, a client can make gifts to any number of donees before year end, and, as long as each gift is no more than $15,000, the gifts will not be taxable or count against the donor’s unified estate and gift tax exemption. Married clients can make joint gifts of up to $30,000 to each donee under the gift-splitting rules.

A reminder that a gift must be made by Dec. 31 for the gifts to count as being made in 2018, and that a gift made by check generally will not count as a 2018 gift for gift tax purposes if it is not cashed or deposited by the donee in 2018.

Miscellaneous Planning

Postponing Income and Accelerating Deductions

Usually, it makes sense for clients to defer income into later years and to accelerate deductions into the current year. Besides reducing the amount of the client’s income subject to tax, this strategy also reduces his or her AGI, which may allow the client to avoid being subject to the net investment income tax or losing all or part of certain deductions that are subject to phaseout or elimination based on AGI.

Clients who have money to donate but do not know which charity they want to contribute it to can consider donating the money to a donor-advised fund. The client can then take the deduction in the current year while advising the fund on which charities to give the contributed funds to over the next couple of years.

Accelerating Income and Postponing Deductions

Postponing income and accelerating deductions is not always the right strategy. If a client expects a substantial increase in income or anticipates using a less-favorable tax filing status in future years, accelerating income into the current year may be an appropriate strategy to lessen the client’s tax bill next year. This can be accomplished by moving up planned retirement distributions (assuming the 10% additional tax does not apply), selling gain-generating assets, billing clients in advance, or deferring deductions (e.g., delaying the purchase of business property that will generate Sec. 179 deductions and depreciation) to the following year.