Tax planning is especially complicated this year-end due to the new Tax Cuts and Jobs Act (TCJA). Under the TCJA, tax rates are cut, personal exemptions are eliminated, the standard deduction is increased and certain itemized deductions are modified—just to mention a few of the major changes.
The TCJA provisions for individuals are generally effective for 2018 through 2025. Following are seven ways to maximize the tax benefits at the end of the year.
- Capital gains and losses: After the TCJA, investors continue to offset capital gains and losses against each other. As a result, you might realize capital gains from sales of securities to absorb capital losses from earlier in the year or realize losses to offset capital gains plus up to $3,000 of ordinary income in 2018.
The maximum tax rate on long-term capital gain for assets owned longer than a year remains at 15% and 20% for certain high-income taxpayers. But the TCJA tweaks the bracket amounts for these purposes, so plan accordingly.
- Charitable donations: The TCJA generally preserves the deduction for charitable contributions made by itemizers to qualified organizations. But you may not itemize this year due to the increased standard deduction and cutbacks for other itemized deductions.
Therefore, you should bunch donations in a tax year you expect to itemize, if possible. If you will not itemize deductions this year, you may as well postpone large gifts to 2019.
- SALT payments: Previously, you could deduct the full amount of the state and local taxes (SALT) paid during the tax year. However, the TCJA limits the SALT deduction to $10,000 for any combination of (a) state and local property taxes and (b) state and local income or sales and uses taxes.
As with charitable donations, figure out your tax status for this year. If you will be itemizing deductions, you might prepay taxes due in 2019 if it will increase your 2018 deduction.
- Medical expenses: If you itemize, you can only deduct un-reimbursed medical expenses above an annual threshold. The TCJA decreases the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI, retroactive to 2017. But this temporary tax break ends after 2018.
For many taxpayers, this may be the last opportunity to qualify for a medical deduction. When appropriate, move non-emergency expenses, such as a medical exam or dental cleaning, from 2019 into 2018.
- Alimony expenses: Prior to the TCJA, alimony was deductible by the payor and taxable to the recipient, if certain requirements were met. For instance, payments had to be made pursuant to a divorce or separation agreement.
Now the TCJA repeals the deduction, and corresponding income inclusion, for alimony. Unlike most other changes for individuals, this provision generally is effective for agreements entered into after 2018. Thus, you can have an agreement executed in 2018 that takes these tax factors into account.
- Family income-splitting: Despite the tax rate cuts in the TCJA, highly-taxed parents can still benefit from “splitting income” with lowly-taxed children through transfers of income-producing property. For 2018, the top tax rate is 37%, down from 39.6%, while the bottom tax rate remains at 10%.
Nevertheless, be aware of the “kiddie tax.” This special tax provision generally applies to unearned income above $2,100 received by a dependent child under age 19 or full-time student under age 24. Under the TCJA, the kiddie tax is based on the tax rates in effect for estates and trusts.
- Mortgage interest: The TCJA modifies the deduction for mortgage interest expenses by lowering the deduction threshold for acquisition debt from $1 million to $750,000. (Deductions for prior debts are “grandfathered.”) In addition, the new law eliminates deductions previously allowed on the first $100,000 of home equity debt.
However, if you use a home equity loan to substantially improve a qualified residence, the debt is treated as an acquisition debt. Accordingly, if you take out a home equity loan in 2018 and use the proceeds for home improvements, the interest is deductible within the usual limits.
Consult with your JMF professional tax advisers concerning your situation.