Year-End Tax Planning: The Things You Need to Know
More Major Tax Changes in 2018
In our last blog we pointed out that there are some major changes for year-end tax planning for 2018. With Tax Reform in 2018, there are significant changes for both individuals and businesses. If you remember, we told you about how the IRS has to create or revise approximately 450 forms, publications and instructions. Also, the IRS has to modify around 140 information technology systems to make sure it can accommodate the new tax forms. This will include writing tax regulations for all of these changes – a daunting task for sure. The following are issues that could affect your or you personally. So you may need to plan for these tax changes.
Deductions
Although the tax reform increased the standard deduction, possibly making it a better choice for the federal return for some, most states did not conform to the federal changes, making it business as usual for itemizing on the state return. So here is another year-end tax planning concern.
Remember the Annual Gift Tax Exemption
One of the best ways to ultimately reduce your estate taxes and at the same time give to those you love is to take advantage of the annual gift tax exemption. Although the gifts are not tax-deductible, for tax year 2018, you are able to give $15,000 to each of as many people as you want without having to report the transfer to the government or pay any gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $15,000 over into 2019.
Home Equity Debt
The interest on home equity debt is not allowed as an itemized deduction for years 2018 through 2025. But that doesn’t mean it can’t be deducted somewhere else on your return as investment interest or business interest, if you can trace the use of the loan funds to a deductible use.
Retirement Savings
Be sure to maximize your retirement plan contributions before year-end. Once the year is gone, you have forever lost an opportunity to make this year’s annual tax-advantaged addition to your savings for future retirement, which won’t be all that pleasant without a substantial retirement nest egg. If your employer matches some of the amount you contribute to your 401(k) or another eligible retirement plan, be sure to contribute as much as you can to take full advantage of this perk. If the contributions are tax-deductible, such as to a traditional IRA, or made with pre-tax income, maximizing the contributions may also cut your tax bill.
Divorce in the Future
If you or someone you know is contemplating divorce, you should be aware of a big tax change related to alimony. For divorces finalized by the end of 2018, alimony payments are deductible by the one paying them and considered income to the one receiving them. However, for divorces finalized after 2018, alimony is no longer deductible by the payer and is no longer taxable for the recipient. This can have a significant impact on the terms negotiated during a divorce.
Maximize Business Expenses
Here is another area to help with year-end tax planning. Beginning in 2018, business owners are able to write off most business purchases using the very liberal 100% bonus depreciation and the Sec. 179 expensing allowance. But to benefit, the business asset must not only be purchased before year’s end, it must also be placed into service by year’s end.
New Flow-Through Deduction or Pass-Through Deduction
Individuals with taxable incomes (net of capital gains) less than $157,500 and married couples filing jointly with taxable incomes less than $315,000 will enjoy the benefits of the new 20% pass-through deduction from business entities other than C-corporations. Taxpayers with higher incomes will want to determine if any change in compensation structure might increase the deduction.
Additionally, S-corporation employee-stockholders will need to make sure their salary meets the “reasonable compensation” requirements. Since the wages are a critical factor in determining the flow-through deduction from an S-corporation this is important.
Every Taxpayer’s Situation is Unique
Not all of these suggestions may apply to you. You can read the others in Part 1. By no means does the list include all the changes brought about by tax reform. However, they cover many of the major issues for taxpayers and small businesses. Do you had any major business, income, or family changes? Do any of the issues in this article affect you? A year-end tax planning appointment may be appropriate. The best way to ensure that you are putting yourself into the best tax-advantage position is to consider all of your tax options. Please call with questions or to make an appointment. We have 3 convenient locations in Norwell, Weymouth and Dedham.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.
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