2018 Year-End Tax Planning Introduction to Planning

[Pages:41]2018 Year-End Tax Planning

Introduction to Planning

December 6, 2018

Dear Client and Business Professionals:

As 2018 draws to a close, there is still time to reduce your 2018 tax bill and plan ahead for 2019. This letter highlights several potential tax-saving opportunities for you to consider. We would be happy to meet with you to discuss specific strategies. The information below is the current law and if the law changes, we will update you with that information. We have identified some areas of concern/opportunity in the material below. As your CPAs at Wheeler & Egger CPAs, LLP, we are committed to providing you with up-to-date information and timely guidance. To stay on course, we hope to encourage you to see the importance of first, consulting with us regarding any tax law changes that could affect you and/or your business, and then second, taking strategic advantage of potential tax planning possibilities, when appropriate.

In December 2017, the President signed into law the Tax Cuts and Jobs Act ("Tax Act" or "Act") which introduces the most significant changes to the U.S. tax system since 1986. With a few exceptions, the provisions are generally effective starting in the 2018 tax year. As such, your federal and state income tax returns for the 2018 tax year may look substantially different as compared to prior years. If you have any questions regarding the application of the Tax Act, please ask us for advice in that regard.

Individual taxpayers file their 2018 income tax return on Form 1040, U.S. Individual Income Tax Return, with a standard due date of April 15, 2019, with an automatic 6-month extension until October 15, 2019. U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. The FBAR due date for 2018 is the same as the U.S. tax filing deadline of April 15, 2019, with an automatic six-month extension to October 15, 2019 if the original due date is not met.

Basic Numbers You Need to Know

Because many tax benefits are tied to or limited by adjusted gross income (AGI)--IRA deductions and medical expenses, for example--a key aspect of tax planning is to estimate both your 2018 and 2019 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2017 tax return and your 2018 pay stubs and other income and deduction related materials are a good starting point for estimating your AGI.

Another important number is your "tax bracket," i.e., the rate at which your last dollar of income is taxed. The tax rates for 2018 are as follows: 10%, 12%, 22%, 24%, 32%, 34%, and 37%. The 2018 brackets start at lower taxable income amount thus making your 2018 income possibly subject to lower rates in 2019. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).

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For some employees who moved during 2017, their 2018 income and AGI could be affected. The IRS has indicated that reimbursements an employer pays to an employee in 2018 for qualified moving expenses incurred in a prior year are excludible from the employee's income. The same is true if the employer pays a moving company in 2018 for qualified moving services provided to an employee before 2018. To qualify, the reimbursements or payments must be for work-related moving expenses that would have been deductible by the employee if the employee had directly paid them before January 1, 2018. The employee also must not have deducted the moving expenses in 2017. (Employers that treated the reimbursements or payments as taxable are supposed to adjust the employee's wages for 2018).

Checklist for Year-end Planning

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals, please review strategies with us before action is taken.

? Realize losses on stock while substantially preserving your investment position. ? Postpone income until 2019 and accelerate deductions into 2018 to lower your 2018 tax bill. ? Recharacterizing of the traditional IRA to a Roth IRA conversion. ? It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may

be coming your way. ? Consider using a credit card to pay deductible expenses before the end of the year. ? Consider asking your employer to increase withholding of state and local taxes (or pay estimated tax

payments of state and local taxes) before year-end. ? Take an eligible rollover distribution from a qualified retirement plan before the end of 2018 if you are

facing a penalty for underpayment of estimated tax and withhold sufficient taxes to address the problem. Direct income tax to be withheld from the distribution and applied taxes toward the taxes owed for 2018. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received from the qualified retirement plan plus the amount of withheld tax provided from other sources, to a traditional IRA. No part of the distribution will be includible in income for 2018 because the gross amount is rolled over, but the withheld tax will be applied pro rata over the full 2018 tax year to reduce previous underpayments of estimated taxes ? Increase payroll withholding during the remainder of 2018, to cover underpayments of 2018 estimated tax. ? Estimate the effect of any year-end planning moves on AMT and other taxes for 2018. ? You may be able to save taxes this year and next year by applying a bunching strategy to tax expenses (if under $10,000), interest deductions, charitable contributions, and medical expenses. ? For 2018, the "floor" beneath medical expense deductions for those age 65 or older is 7.5% of adjusted gross income (AGI). ? You may want to pay contested state and local taxes before the end of the year, so as to be able to deduct them this year while continuing to contest them next year, if the total state and local tax deduction is below $10,000.

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? You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

? Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employersponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-?. That start date also applies to company plans, but non-5% company owners who continue working, may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-?, the first distribution calendar year is the year in which the IRA owner attains age 70-?. Thus, if you turn age 70? in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019 ? the amount required for 2018 plus the amount required for 2019. Think twice before delaying 2018 distributions to 2019, as bunching income into 2019 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2019 if you will be in a substantially lower bracket that year.

? Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.

? If you become eligible in or before December of 2018 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2018 if paid by April 15, 2019.

? If you are thinking of installing energy saving improvements to your home, such as certain highefficiency insulation materials, do so before the close of 2018.

? Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

? To reduce 2018 taxable income, consider deferring a debt-cancellation event until 2019. ? To reduce 2018 taxable income, consider disposing of a passive activity in 2018 if doing so will allow

you to deduct suspended passive activity losses. ? If you own an interest in a partnership or S corporation, consider whether you need to increase your basis

in the entity so you can deduct a loss from it for this year.

Year-End Tax Planning Moves for Businesses and Business Owners, please review strategies with us before action is taken.

? Businesses should consider making expenditures that qualify for the business property expensing option. ? Businesses also should consider making new and used property expenditures that qualify for 100% bonus

first year depreciation if bought and placed in service this year. ? Businesses may be able to take advantage of the "de minimis safe harbor election" (also known as the

book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies. ? If your business qualifies for the domestic production activities deduction (DPAD) for its 2018 tax year,

consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2018 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2018, even if the business has a fiscal year.

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? If your business qualifies for the new 199A 20% of profits standard deduction for the 2018 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase the W-2 wages deduction.

Please look over the Table of Contents with its hotlinks to quickly access, in more detail, the information that applies to you and your situation. We have expanded this letter to include some Affordable Care Act (ACA) explanations. There is additional information regarding the ACA on the Website, under the "Services" tab.

Let us know how the website is helpful to you, and do not hesitate to offer possible recommendations for the website as well!

Please remember these are just brief highlights of what are broad areas of the Tax Code and its intricacies. While the following information can be useful, it is not intended to be a substitute for tax planning advice from our office.

2018 Year-End Tax Planning Guide Introduction to Planning

Planning for Individuals

? Filing Status ? Basic Numbers You Need to Know (We can help you do the calculations.) ? Up-Date on Annual Gift Tax Exclusion IRS Rules ? IRA and Retirement Savings Rules for 2018

o 2018 and 2019 Plan Limitation Amounts o Traditional IRAs o Spousal IRA o IRA Rollovers o Roth IRA* o Roth IRA Conversion Rule o Deductible and Nondeductible Contributions o 401(k) Contribution o SIMPLE Plan Contribution o Catch-up Contributions for Other Plans o Saver's Credit o Required Minimum Distributions o Maximize Retirement Savings ? Deferring Income to 2019 o Delay Billing o Interest and Dividends ? Accelerating Income into 2018 o Accelerating Collection of Accounts Receivables o Year-End Bonuses o Retirement Plan Distributions o Roth IRA Rollover Distribution (*See above)

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? Deduction Planning for Individuals o Deductions in Year Paid o Payment by Check o Promise to Pay -- not an allowable deduction o AGI Limits o Standard Deduction versus Itemized Deduction Planning o Medical Expenses o State and Local Income Taxes and General Sales Taxes o Charitable Contributions o Change Charity Method of Giving and Take Advantage of New Tax Law

? Education and Child Tax Benefits o Child Tax Credit o Credit for Adoption Expenses o Education Credits o Lifetime Learning Credit o Coverdell Education Savings Account o Student Loan Interest o Kiddie Tax o Achieving a Better Life Experience (ABLE) Account

? Energy Incentives o Residential Energy Efficient Property Credit

? Investment Planning o Rules Regarding Capital Assets in 2018 o What Tax Savings are Available for Taxpayers with Investment Income o Timing of Sales o Dividends o Other Tax Planning Opportunities

? Health Care Planning (Find more information under Web-site tab, "Services") o Individual Mandate o Health Care Flexible Spending Accounts o Self-Employed Health Insurance Premiums o Health Savings Accounts

? Alternative Minimum Tax/Estimated Taxes o Is the Taxpayer Subject to the Alternative Minimum Tax o Is the Taxpayer Required to Make Estimated Tax Payments

? Reporting o Report of Foreign Bank and Financial Accounts (FBAR)

Planning for Businesses

? Deferring Income into 2019 o Use of Cash Method of Accounting o Installment Sales o Delay Billing o Interest and Dividends

? Accelerating Income into 2018

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? Business Deductions o Equipment Purchases o Bonus Depreciation o Self-Employed Health Insurance Premiums o Vehicles Weighing Over6,000 Pounds o Capitalization of Tangible Property o Home Office Deduction o NOL Carryforward Period

? IRC ?199A (New Business Standard Deduction) o IRS Issues Proposed Reliance Regulations o Qualified Business Income (QBI) o Trade or Business o Rental Real Estate o Calculating the Deduction o Specified Service Trade or Business (SSTB) o Proposed Regulations Give (Somewhat) Specific Guidance o Wages and Depreciable Assets ? The "Wages Limitation"

? IRC ?1400Z-2 (Qualified Opportunity Zones) o Qualified Opportunity Zones o Qualified Opportunity Fund o Benefits of Investing in Qualified Opportunity Zones Under the TCJA

? Business Credits o Small Employer Pension Plan Startup Cost Credit o Employer-Provided Child Care Credit

? Inventories o Subnormal Goods

? Planning for 2019 Tax Increases and Potential Expiration of Tax Relief Provisions o S-Corporation Built-In Gains Tax o Exclusion of Gain Attributable to Certain Small Business Stock

o Basis Adjustment to Stock of S-Corporations Making Charitable Contributions of Property

? Employer-Provided Child Care Credit ? Health Care Planning

o SHOP Exchanges o Pay of Play Excise Tax o Health Care Reporting o Health Reimbursement Arrangements o Credit for employee Health Insurance Expense of Small Employers ? Reporting o Tax Returns o FBAR o FACTA o Uncertain Tax Position ? Electronic Deposits ? EFTPS o Electronic Funds Transfer ? Estimated Tax Payments

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Planning for Individuals

Filing Status (Back to Top)

As a general reminder, there are several ways in which you can file an income tax return: married filing jointly, head of household, single, and married filing separately. A husband and wife may elect to file one return reporting their combined income, computing the tax liability using the tax tables or rate schedules for "Married Persons Filing Jointly." If a married couple files separate returns, under certain situations they can amend and file jointly, but they cannot amend a jointly filed return and file separately. A joint return may be filed even though one spouse has neither gross income nor deductions. If one spouse dies during the year, the surviving spouse may file a joint return for the year in which his or her spouse died. Certain married persons who do not elect to file a joint return may be entitled to use the lower head of household tax rates. Generally, in order to qualify as a head of household, you must not be a resident alien, you must satisfy certain marital status requirements, and you must maintain a household for a qualifying child or any other person who is your dependent, if you are entitled to a dependency deduction for the taxable year for such person.

Basic Numbers You Need To Know (We can help you do the calculations.) (Back to Top)

Many tax benefits (i.e., your ability to take itemized deductions; IRA deductions; tax credits; exemptions) and additional taxes (3.8% Investment Income Tax and the additional .9% Medicare tax on earned income) are tied to or limited by your annual adjusted gross income (AGI) and wages. Therefore, a key aspect of tax planning is to estimate both your 2018 and 2019 AGI to see whether you could benefit by either accelerating into 2018 or deferring into 2019, some of your income or deductions for tax planning purposes. Your 2017 tax return and your 2018 pay stubs and other income or deduction related materials are a good starting point for estimating your AGI and your potential income tax before tax planning changes we make.

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

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The 0.9% additional Medicare tax also may require year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of the employee's filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple's combined income won't be high enough to actually cause the tax to be owed.

Another important number is your "tax bracket," i.e., the rate at which your last dollar of income is taxed. The tax rates for 2018, barring any changes in Congress, are 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the 2019 tax brackets will be indexed for inflation. If your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).

For Taxable Years Beginning in 2018 and 2019, The Tax Rate Tables for 2018 and projected for 2019 under ?1 Are as Follows:

INCOME TAX RATES FOR 2018

TAX RATE SINGLE TAXPAYER MARRIED FILING JOINTLY ESTATE OR TRUST

10%

$0 to $9,525

$0 to $19,050

$0 to $2,550

12%

$9,526 to $38,700

$19,051 to $77,400

not applicable

22%

$38,701 to $82,500 $77,401 to $165,000

not applicable

24%

$82,501 to $157,500 $165,001 to $315,000

$2,551 to $9,150

32%

$157,501 to $200,000 $315,001 to $400,000

not applicable

35%

$200,001 to $500,000 $400,001 to $600,000

$9,151 to $12,500

37%

over $500,000

over $600,000

over $12,500

PROJECTED INCOME TAX RATES FOR 2019

TAX RATE SINGLE TAXPAYER MARRIED FILING JOINTLY ESTATE OR TRUST

10%

$0 to $9,700

$0 to $19,400

$0 to $2,600

12%

$9,701 to $39,475

$19,401 to $78,950

not applicable

22%

$39,476 to $84,200 $78,951 to $168,400

not applicable

24%

$84,201 to $160,725 $168,401 to $321,450

$2,601 to $9,300

32%

$160,726 to $204,100 $321,451 to $408,200

not applicable

35%

$204,101 to $510,300 $408,201 to $612,350

$9,301 to $12,750

37%

over $510,301

over $612,351

over $12,751

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