Tax Reform 2018 – Where do we Stand
As we approach the end of another year, we are close to being two years into the Tax Cuts and Jobs Act (“Act”) that was passed late in 2017 and became effective on January 1 of 2018. The Act made significant income tax changes including lowering income tax brackets and increasing standard deductions.
As with every year, it makes sense to consider income tax planning moves that can help lower your tax bill this year and next. The general strategy of deferring income into next year and accelerating deductions into this year still makes sense for most people – although the ability of many people to benefit from accelerating deductions into this year has decreased as a result of fewer people itemizing their deductions. Here are some items for you to consider.
POSTPONE INCOME. A couple ways to do this:
• If you are a participant in a retirement plan and have not maxed out your pre-tax contributions for 2019, it is always a good idea to do so to get the benefit of tax-deferred growth. Make sure you are contributing as much as your budget allows, or at least up to the point of getting the full amount of a company match.
• If you own a business and are a cash-basis taxpayer, consider waiting until late in the year to send out invoices. This way you likely won’t receive payment until 2020 when you have to claim the payment as income. Also consider prepaying some business expenses.
ACCELERATE DEDUCTIONS. Given that the standard deductions under the Act have increased significantly, many people who used to itemize their deductions no longer do. If you are in a position to itemize deductions, consider accelerating the payment of certain expenses into 2019 especially if you expect your 2019 income to be higher than usual. Some thoughts:
• Consider scheduling elective medical procedures to increase the amount of your medical expenses. Remember the threshold for deducting medical expenses in 2019 jumps from 7.5% to 10% of adjusted gross income.
• Make charitable donations this year instead of waiting until next year.
Here are some other strategies that always make sense to consider:
DONATE APPRECIATED STOCK OR MUTUAL FUND SHARES. This allows you to deduct the fair market value of the securities if you itemize deductions and avoid paying capital gains tax. On the other hand, if you have securities that have decreased in value, sell them first to secure a tax write-off and donate the proceeds.
QUALIFIED CHARITABLE DISTRIBUTIONS. If you are over 70 ½, the best approach might be to arrange to have money transferred directly from your IRA to the charity, a so-called Qualified Charitable Distribution (“QCD”). You can contribute up to $100,000 annually using this method. The benefit is two-fold: QCDs count toward your annual required minimum distribution and they directly reduce your adjusted gross income, which can lower the impact of the net investment income tax and Medicare part B and D premium surcharges.
GIVE APPRECIATED SECURITIES TO YOUR CHILDREN. If you want to help your adult children, give them shares of appreciated securities instead of cash if they are in a lower income tax bracket than you. For 2019, if your single child has taxable income of less than $39,375, his or her long-term capital gain tax rate is 0%. So, instead of selling shares to give cash to your children, give them the shares and let them sell them. This only works with children who are old enough to be exempt from the “kiddie tax” which generally means they must be 19 or older and out of school, or 24 or older if they are still in school. In 2019, you can give up to $15,000 a year ($30,000 if you are married) to an individual and not have to file a gift tax return.
SPOUSAL IRAS. Generally, individuals who are unemployed are not permitted to contribute to IRAs because they do not have eligible compensation. However, the employed spouse is allowed to make an IRA contribution on behalf of a non-working spouse if certain conditions are met: you and your spouse must file a joint tax return and the amount of earned income on your tax return must be at least equal to the amount you contribute to your IRAs. These so-called spousal IRAs are subject to the income limitations shown below.
HEALTH SAVINGS ACCOUNTS (“HSA”). If you are covered under a qualifying high-deductible health care plan either at work or individually, consider opening and funding an HSA. Annual contribution limits for 2019 are $3,500 for individual coverage and $7,000 for family coverage, plus catch-up contributions of $1,000 for participants who are 55 and older. Contributions are tax deductible and, unlike IRAs, there are no income limits. Earnings in these accounts are tax-free and withdrawals are tax-free if used for qualifying medical expenses. The contribution limits increase in 2020 to $3,550 for individual coverage and to $7,100 for family coverage. A related strategy: you are allowed a once-in-a-lifetime transfer from a regular IRA to an HSA, provided that you are covered by an eligible health care plan for at least 12 months after the transfer. The transfer amount is limited to the maximum allowed HSA contribution for the year minus any contributions you’ve already made. This strategy works best if you don’t have cash outside the IRA to contribute to the HSA.
Finally, here are the annual limits applicable to 2020 for retirement plans, payroll tax and estate and gift tax:
RETIREMENT PLAN LIMITS.
• The contribution limit for company-sponsored 401(k), 403(b) and 457 plans increases by $500 for 2020 to $19,500 with a catch-up contribution of $6,500 allowed for individuals 50 and older.
• IRA and Roth IRA contribution limits remain unchanged at $6,000 plus $1,000 catch-up for age 50 and older.
• IRA deductions phase out for taxpayers over certain income levels:
• Contributions to a Roth IRA are phased out starting at AGI of $124,000 for single taxpayers and $196,000 for married taxpayers filing jointly.
• Given the low income tax rates that are in place for the next 6 years, you may want to consider making some after-tax contributions to your retirement plan or IRA instead of funding the plan or IRA exclusively with pre-tax contributions.
PAYROLL TAX. The Social Security wage base will increase to $137,700 in 2020. The Social Security tax rate paid by employers and employees stays at 6.2%, while the Medicare portion for both stays at 1.45%. The additional .9% Medicare payroll tax continues to apply to single filers with modified adjusted gross income in excess of $200,000 and for couples with modified adjusted gross income in excess of $250,000.
ESTATE AND GIFT TAX. The Federal estate tax exemption amount will increase from $11,400,000 in 2019 to $11,580,000 in 2020. This means that an individual can leave up to $11,580,000 to his or her heirs without the imposition of Federal estate or gift tax while a married couple can protect $23,160,000 by using portability. The estate tax rate will remain at 40%. For gift tax purposes, the annual gift tax exclusion amount remains at $15,000 in 2020.