CCH Tax Briefings:
Year-End Tax Planning
Cuts and Jobs Act
Cuts and Jobs Act Guidance
As year-end approaches you should take some time to think about
your tax situation. Look closely at how much you are earning,
spending, and how that effects your tax situation.
Year-end tax planning is about timing. Conventional wisdom holds
that taxpayers should accelerate deductions into the current year
while deferring income into the next year. The premise here is
that a dollar saved today is worth more than a dollar saved
tomorrow, so lowering this year's taxes is better than lowering
next year's taxes.
Conventional Tax Planning Tips
Unless you believe that next year you will be in a higher
personal income tax bracket, you may want to defer income until
after the first of the year. If you believe that your tax bracket
will be higher this year than next, you may want to accelerate
deductions. Bottom line: review your taxes before it's too late.
Here are some tax planning
strategies to consider implementing before year-end to keep your
income tax bill as low as possible. Chances are at least some of
them will apply to you.
Starting in 2019, alimony is no longer deductible by the payor
spouse and includible in income by the recipient spouse. This rule
only applies for divorce or separation instruments executed after
December 31, 2018, and instruments executed on or before December
31, 2018, but modified after that date to include these new
provisions. You may be able to cut your tax bill by making alimony payments
before yearís end. You should probably check with your ex-spouse
first, as he or she will have to claim the payments as taxable
Bunch Your Itemized
If your total itemized deductions are close to the standard
deduction amount each tax year, consider bunching together
expenses for itemized deductions every other year. Itemize in
those years to deduct more than the standard deduction amount.
Then claim the standard deduction in the other years. Over time,
this technique can save thousands of dollars in taxes by
significantly increasing your cumulative write-offs.
For 2018, the standard deduction
for taxpayers Married Filing
Jointly and $12,000 for Single or Married Filing Separately
taxpayers. The standard deduction
is $18,000 for Heads of Households.
Under the cash method of accounting you claim income and deduct
expenses in the year they are received or paid. Under the accrual
method of accounting you claim income and deduct expenses in the
year they accrue. The discussion immediately below pertains to
cash method of accounting business owners.
You might consider invoicing
customers in late December or January so you donít have to
include that income on your 2018 tax return. Keep in mind that it
may only make sense to defer income if you think you will be in
the same or a lower tax bracket next year. For every dollar of
income deferred until January 2019, you will not owe taxes on that income
until April 2020.
Now may be the time to stock-up.
Purchase items your business will require in the immediate future
to maximize deductions for this year. You can accelerate your
expenses for this year by buying office supplies and any other tax deductible items before December 31st.
And be sure to save your receipts for tax time!
Pay your bills for telephone,
cell phone, subscriptions, rent, insurance, and utilities early to
take the deduction this year.
If you will be buying new office
equipment in the near future, consider purchasing it now. Your
equipment will have to be in your office, "placed in
service" by year-end.
You can deduct donated household goods, clothing, and other items
so long as they are in good or better condition. You will need a
written receipt for all charitable donations. You can also deduct
the cost of driving for charity at 14
cents per mile. However, you
cannot take a charitable deduction for the value of your time when
Delay Mutual Fund Purchases
The later it gets in the year, the more likely you'll receive the
year-end capital gain distributions on any mutual fund you didnít even own
except for a short time during the year. If you buy shares just
before the ex-dividend date, you'll get back part of the money you
just invested and owe taxes on it. Check the mutual funds
distribution schedule (ex-dividend date) and if it's late in the
year, wait until after that date to buy into the fund.
Flexible Spending Accounts
If you have a Flexible Spending Account you have set aside
tax-free earnings to cover medical and dental expenses through a
plan offered by your employer. You should use up any funds in your
Flexible Spending Account. If you donít, you risk losing that
money forever, unless your employer amended the plan to allow
unused funds to be utilized within 2 1/2 months after year
end, or your employer amended the plan to allow you
to carryover up to $500 in unused expenses. Make doctor appointments now, and buy necessary
medical supplies that are covered in the plan Ė such as
eyeglasses and medications.
Give Appreciated Stock to
Charity Ė Sell the Losers
You have some appreciated stock that youíve owned for over a
year. Consider donating the shares to charity. You generally can
claim an itemized charitable contribution deduction for the full
market value of the stock at the time of the donation - and youíll
avoid any capital gains tax. On the other hand, donít donate
stocks with a loss. Sell them, take the capital loss, and give
away the cash proceeds. That way, youíll write off the full
amount of the cash donation while keeping the tax-saving capital
loss for yourself .
Make an Extra Mortgage
Make one additional mortgage payment on or before December 31st so
you can deduct the additional interest paid. Make sure that the
additional interest payment is included on you Form 1098-Mortgage
Interest Statement that you receive from your lender next month.
If not, you may need to add the interest amount to the amount reported by
your lender, and attach an explanation to your tax return.
Beginning in 2018, taxpayers may
only deduct interest on $750,000 of qualified residence loans. The
limit is $375,000 for a married taxpayer filing a separate return.
The $1 million debt limit still applies if a taxpayer has entered
into a binding written contract before December 15, 2017, to close
on the purchase of a principal residence before January 1, 2018,
and actually closes before April 1, 2018. The $1 million debt
limit also continues to apply for acquisition debt incurred before
December 15, 2017, that is refinanced on or after December 15,
2017. Interest on home equity debt is no longer deductible. The
limits apply to the combined amount of loans used to buy, build or
substantially improve the taxpayerís main home and second home.
Prepay Medical Expenses
Medical expenses are one of the least useful tax deductions
because you must spend more than 7.5% of your adjusted gross
income to claim any tax deduction for 2018. Pay doctor bills, insurance
premiums, buy eyeglasses, and stock up on prescription drugs now.
Medical expenses exceeding 7.5% of your adjusted gross income are
deductible for 2018. Medical expense deductions revert to prior law in 2019.
Prepay Property Taxes
If you're not affected by the Alternative Minimum Tax, and you
don't think your personal income tax bracket will be higher next
year, you might want to pay your property taxes and take the
deduction now. If you prepay any 2019 property taxes before January 1st,
you can deduct that amount on your 2018 income tax return.
However, donít do this if you
know youíll owe the Alternative Minimum Tax for 2018.
Write-offs for state and local income and property taxes are
completely disallowed under the Alternative Minimum Tax rules.
Keep in mind that the itemized
deduction for state and local taxes on Schedule A is now limited
to $10,000 through 2025.
Contributions to a retirement plan reduce your taxable income.
Review your retirement plan options and decide on setting up a
retirement plan. Many retirement plans need to be established by
December 31st to make tax-deductible contributions for
Remember that ordinarily you can
contribute an entire year's retirement plan contribution each
year, even if you started a new job in the last quarter of the
year. Some taxpayers who begin a new job in the last quarter
arrange to have their entire paycheck go into the plan - which
eliminates their taxable income.
Even though the stock market has gone up substantially since the lows of
March 2009, many investors still have long-term capital losses on
investments theyíve held longer than one year. If you have
capital gains you can take losses to offset some of the capital
gain income by selling losing investments. This will offset any
capital gains you made this year. Losses offset gains dollar for
dollar, and losses in excess of your gains can be deducted, up to
$3,000 per year against ordinary income. The excess losses are
carried forward to future years - but they are forfeited upon
death. Alternatively, if you already
have capital losses, you may want to take some gains if you do not
need the capital loss deduction this year.
This yearís top capital gains
tax rate is 20%, for those in the highest bracket.
It's 23.8% when including the 3.8% Affordable Care Act Medicare Surtax for those in the
If your income tax bracket is in the middle, then the current tax rate for your long-term capital gains
is 15%. If you
are in the lowest bracket, then the current tax rate for
your long-term capital gains is 0% percent. In that case you are best just claiming the capital
gain as it is tax free.
What if you have both gains and
losses in your stock portfolio? Which ones should you sell? First,
sell the long-term winners - stock held for over 12 months. Youíll
benefit from the low maximum long-term capital gains rate.
Which stocks should you sell to
offset those gains? You will get the most tax savings with a
short-term loss because short-term losses first go to offset
short-term gains that would otherwise be taxed at your regular
income tax rate, which can be as high as 37%, and then to offset
long-term 20% gains.
You can further reduce taxes by
telling your broker to sell your highest-cost basis shares first.
Using this method requires you to identify the shares to be sold
by specifying their cost and purchase dates. You must also receive
a written confirmation of your instructions from the broker or
keep a record of your oral instructions in your tax file.
If you don't follow this
procedure, you must use the first-in, first-out (FIFO) method,
meaning the shares you bought first are considered sold first.
Those are the shares most likely to have the largest capital gains
Ė and tax hit.
Stocks and bonds that became completely worthless during the tax year are treated as though they were sold for zero dollars on the last day of the tax year. This affects whether
your capital loss is long-term or short-term Ė although most securities do not become worthless in the year they are purchased or otherwise acquired - so losses from worthless securities are almost always long-term losses.
Worthless means of absolutely no value. Just because a company is not doing very well financially, itís shares decline in price, itís shares were de-listed by the stock exchange or NASDAQ, or the company filed for bankruptcy protection, does not necessarily mean
that the securities are worthless. Be prepared to prove to the IRS that the securities are
If the security isnít completely worthless, but you desire to take a capital loss, then
you should sell the securities for whatever you can get no later than the last day of
2018. Thatís where year-end tax planning comes in.
Be careful to avoid a "wash
sale". If you buy the same security within 30 days before or
after you sell the original shares the tax rules disallow the
The American Opportunity Credit is a tax credit of up to $2,500
for paying tuition and other education expenses. This
credit is available for 2018.
Organize Your Financial
Good record-keeping pays off at tax time. It makes your tax
return preparation easier and faster, and we might uncover
additional tax deductions. Remember, the IRS requires receipts and
These year-end tax planning tips will apply differently to each
taxpayer. Changes to your adjusted gross income from one year to
the next can have a negative impact under certain circumstances. For
instance, postponing an IRA distribution will reduce your current
taxable income which is good, but it will increase your next
year's income, which may be bad. Higher income next year can
increase the taxable amount of your Social Security benefits;
reduce or eliminate your ability to make deductible IRA
contributions; and reduce or eliminate your deductions for
medical expenses, casualty losses, charitable contributions and
rental real estate. Higher income could also reduce or eliminate
the tax credits for dependent children and college education
expenses, Roth IRA contributions, conversions of regular IRAs into
Roth IRAs and college education loan interest deductions. Weíll
need to consider the effects of potential year-end tax breaks for
both this year and next, and implement only those ideas that will
put you ahead over the two-year period. Take the time to review
the best strategy with us now and make the most of your year-end