While opportunities for tax planning in 2018 are dwindling, it’s not too early to consider making adjustments for next year. The changes that accompanied the Tax Cuts and Jobs Act of 2017 (TCJA) are coming into focus, and they are keeping tax professionals busier than ever. Here are a few possibilities to consider as you look to the year ahead.
Changes to Consider in 2019
Revisit your 401k contributions
The IRS has raised the limit on contributions to retirement plans in 2019. You can now contribute $19,000/year to your 401k ($25,000 if you’re over 50) and $6,000/year to your IRA’s ($7,000 if you’re over 50).
Reevaluate your withholding
After the TCJA, many employers and pension plans adjusted their tax withholding to reflect the new tax rates. In many cases, this meant lowering the amount withheld for tax and a larger check to you. While your tax rate may have gone down, the elimination of the personal exemption, coupled with the deduction limits on state and local taxes, may mean there’s a tax bill waiting for you in April. Making an adjustment to your withholding early in the year can avoid a repeat in April of 2020.
Bunching your deductions
One of the biggest changes that came with the TCJA is in the area of deductions: many were eliminated. Couple that with an increase to the standard deduction (now $12,000 for individuals, $24,000 for married couples) and itemizing deductions may not be the opportunity it once was. A strategy you may want to consider is bunching deductions together into a calendar year. This could make itemizing deductions more favorable. Opportunities in bunching deductions include: making your charitable gifts every other year, paying only ½ of your property taxes in a given year and making your December mortgage payment in January. Work with your tax professional and advisor sooner than later to come up with a plan.
Plan out your gifting
Due to the aforementioned changes in the standard deduction, it might make sense for you to gift from appreciated assets or (if you’re over 70.5), using a Qualified Charitable Distribution from your IRA. The idea here is to lower your taxable income rather than take the deduction on your Schedule A. Another opportunity lies within a Donor Advised Fund (DAF). If you want to trickle your donations over a few years, but need the tax deduction in one year, (or don’t have time to vet a charity), a DAF might help you make the most of your tax dollars without having to make those decisions all at once.
Review your estate plan
The TCJA also included a few changes that may impact your estate plan. The basic exclusion amount for gift, estate and generation-skipping transfer taxes has doubled to $11.18M per person. While this amount may not be an issue for your estate, the language around the estate tax in previously drafted documents may warrant a checkup. Trusts that include the funding of a bypass trust sometimes reference the estate tax in broad terms, “to the maximum possible amount without incurring estate taxes,” for example. With the continued of the estate tax over the years, this may end up funneling more into this bypass trust than was intended when your trust was drafted.
Business owners, learn about the QBI deduction
Another opportunity that came along with the TCJA applies to business owners. The qualified business income (QBI) deduction is a deduction that is available should your taxable income fall beneath $315,000 (for married filing jointly) or $157,000 (for single filers). Contributions to and distributions from retirement plans, nonqualified deferred compensation payments, investment earnings and the exercising of stock options are just a few variables that could make or break the deduction for business owners.
Other Changes to Come
Next year will mark phase II of the TCJA rollout. Planning at the beginning of the year could help you take advantage of, and avoid some of the impacts of the changes that begin in 2019:
Alimony will no longer be deductible from taxable income by the payer or included in taxable income by the payee.
This applies to divorces finalized after 12/31/2018. Those finalized before 12/31/2018 will be grandfathered into the old rules. There’s some speculation that this may make divorce proceedings more difficult due to the shift in income.
Qualified medical expenses must exceed 10% of AGI (previously 7.5%) in order to be deductible.
This may not have a heavy impact due to the increased standard deduction, but in a medically-expensive year, planning for this shift could make a difference. If possible, bunching this deduction with the others previously mentioned might reduce additional taxation.
The individual mandate for health insurance coverage will disappear.
Individuals will no longer be subject to a penalty for going without insurance coverage; however, at the state level, penalties may still apply. There are speculations across the board on how this will impact insurance availability on marketplace as well as premiums.
Sunset provisions are embedded.
Many of the changes in the TCJA are set to expire in 2025. While no one has a crystal ball, it’s possible that tax rates may return to higher levels after that time, therefore making an argument to recognize income sooner rather than later.
Debates will continue.
With a divided government, we expect continued debate and changes to the TCJA. Individual and corporate tax rates, the state and local tax deduction cap and estate tax exemption are all items that will likely be revisited.
If you’re looking for some guidance on how best to navigate and plan for this new tax picture, or other financial planning issues, give us a call. Our team of CERTIFIED FINANCIAL PLANNERS™ is here to help.