End of Year Tax Planning Tips
The holiday season is under way. Another year is coming to an end and April 15, 2019 is just around the corner. This will be the first time we file returns under the new tax laws. There is still time to plan, but time is quickly running out. Here are some things you can do.
- Itemized/Standard Deduction (See https://magdaabdogomezlaw.com/itemized-deductions-new-tax-act/)
Under the new law the standard deduction has increased to $12,000 for single taxpayers, $18,000 for heads of household and $24,000 for joint filers. This increase, coupled with the limitation on what constitutes an itemized deduction, will generally result in the standard deduction exceeding the itemized deduction.
You can still itemize deductions if these are higher than your standard deduction. Now is the time to make that determination. Your itemized deductions include home mortgage interest and $10,000 ($5,000 single) of local taxes. If you are close to the limit can you accelerate medical and charitable expenses into 2018 so that the itemized deduction is higher than the standard deduction?
a) In 2018 medical expenses in excess of 7.5% of your adjusted gross income can be itemized. In 2019 the 7.5% floor increases to 10%. If you are considering an elective medical procedure, you may want to commit to it in 2018 and take advantage of the deduction.
b) Charitable contributions are deductible up to 60% of your adjusted gross income. Just make sure that you have a receipt for any contributions in excess of $250 and that the deduction does not give you any rights to collegiate athletic events.
- Harvest your Investment Losses
If you have realized capital gains during the year and are planning to sell stocks/mutual funds determine whether any of these sales will generate losses. If so, sell off the investment in 2018 so that you can offset the capital gains with the capital losses. If you have more losses than gains you can offset $3,000 of other income with the losses. Any additional losses can be carried over to next year.
- Maximize contributions to retirement plans
Since the income tax rate for individuals has dropped by 3% it is arguable that deferral of income by contributing to a retirement plan is not as attractive. Nevertheless, there are benefits to contributing to your retirement plan. First, the contributions are not wages and will not be subject to income tax, although they will be subject to social security and medicare tax. Second, you will be taxed on the 401(k) only when you begin to receive distributions. Third, your employer will usually match a percentage of your contribution.
A self-employed individual can also contribute to a retirement plan, for example a Keogh or SEP, so long as the plan was established by December 31.
- Qualified Business Income Deduction
One of the more complicated provisions of the new tax law provides individuals a deduction for qualified business income from a pass through entity. The deduction can be up to 20% of the qualified business income. Note that for certain professionals (lawyer, doctor, accountant, broker, financial services, and several others) the qualified business deduction is subject to an income test. Refer to https://magdaabdogomezlaw.com/overview-qualified-business-income-deduction/ for more specific information.
If you are close to going over the income limits you may want to consider deferring income into 2019 if it will result in your qualifying for the deduction.
- Alternative Minimum Tax
The alternative minimum tax is expected to have much less impact in 2018 than in years past for two reasons. The first is that many of the itemized deductions which were used in the calculation of the AMT are no longer available. The second, and most important, is that the AMT exemption amounts have been increased significantly. For 2018 the exemption from AMT is $1,000,000 for joint filers and $500,000 for individual filers.
- Business Deductions
a) Equipment Purchases
If your business is in need of upgrading equipment this may be the year to make the necessary purchases and take advantage of significant depreciation deductions.
The new tax law has allowed businesses to expense (write off) up to $1 million of equipment purchases for their business so long as the equipment is placed in service by December 31.
If the equipment purchased does not qualify for a write off, a business may be able to depreciate 100% of the purchase price of the equipment so long as the recovery period of the property is 20 years or less. This bonus depreciation also applies to computers, furniture, appliances and other equipment. In order to obtain the bonus depreciation the equipment must be placed in service by December 31, 2022. Thereafter, bonus depreciation begins to decrease by 20% each year until it is reduced to 0% after December 31, 2026.
Reducing the business income may also help you qualify for the qualified business income deduction if the business is a pass through entity.
b) Credit for Family and Medical Leave
Did your business have an employee who took medical/family leave in 2018? Will one of your employees be taking leave in 2019? If so, the business may be entitled to a credit for a portion of the wages paid to the employee while on leave. In order to be eligible for the credit the business must pay at least two weeks of wages to the employee while on leave, pay at least 50% of the wages normally paid to the employee and have a written policy which satisfies certain requirements.
If your business does not have a written policy in place, if one is adopted by December 31, 2018 the policy will be considered to have been in place for 2018 so long as the business brings its leave policy into compliance for the year. Although the medical leave credit is available in 2018 and 2019, the retroactivity provision is only available for 2018.
The amount of the credit is 12.5% of wages paid. However, the credit increases by .25% for each percentage by which the rate of wages paid exceeds 50%. Hence, if you pay an employee 100% of their wages while on leave, your maximum credit is 25% of the wages paid.
In order to qualify for the credit the employee’s wages cannot exceed $72,000 in 2018, the employee must have been employed for at least a year and the policy must cover part-time employees. Note that you cannot claim both a deduction for the wages paid and the credit. For additional details regarding requirements for eligibility see https://www.irs.gov/pub/irs-drop/n-18-71.pdf
Nothing contained in this article is intended to be legal or financial advice. The tax laws continue to be complex and whether these laws apply to you depends on your personal circumstances. It is in your best interest to timely explore which laws would apply to you so that you can take any necessary steps prior to December 31.