This year was big.

The barrage of tax changes and updates were so far-reaching, that every individual and business has been touched by it in some way. With the Tax Cuts and Jobs Act (TCJA) changing the playing field in the tax realm, you may want to consider making some strategic year-end moves to help minimize your tax burden.

We’ve included some of the most frequent approaches that individuals and businesses should consider before the New Year. Take a look at the list below and consider whether any of these suggestions are healthy moves for you. We can help evaluate your position so you can decide the best moves.

Individuals

With so many changes in the tax law, it is strongly recommended to have a tax plan in place. Even if your 2018 income is very similar to your 2017 income, the tax law changes will make your tax results very different. This is due to several eliminated deductions, eliminated personal exemptions and lower tax rates across the board.

Postponing Income
As in the past, many people want to postpone income until 2019 given the chance. Postponing income is typically desirable for those taxpayers who anticipate being in a lower tax bracket next year due to a change in their financial circumstances. In the past postponing income went hand in hand with accelerating deductions; however, accelerating deductions into 2018 may not be advisable due to the increased standard deduction. Instead, you may want to consider bunching your deductions (see bunching deductions discussion below).
Verify Your Withholding
The IRS allows tax to be paid via several methods: payroll withholding, retirement withholding, and quarterly estimates. The IRS has two safe-harbors to avoid underpayment penalties. The first is by paying 100% of your prior year tax amount (110% if your prior year adjusted gross income was over $150,000), and the second is paying 90% of your current year tax amount. Because the payroll withholding tables have changed, it is likely that your payroll withholding went down even if your income stayed that same. It is important to verify that you will meet one of these safe-harbors to avoid penalties.
New Qualified Business Income (QBI) Deduction
The rules for the QBI deduction are very complex. Adding to the complexity are taxable income limitations, wage limitations, and/or asset limitations. If you are in a specified trade or business (most service businesses), the taxable income limitations are critical and will likely make the difference of getting the QBI deduction or not. For these business owners, lowering your taxable income may help you take full advantage of this new deduction. Lowering your taxable income can be done in various ways, including postponing income into 2019, increasing itemized deductions, and increasing retirement plan contributions.
Capital Gains and Losses
If you currently have large realized capital gains, harvest capital losses. You can realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, the original holding can be sold, then buy back the same securities at least 31 days later. Minimizing the net capital gains will also help lower the 3.8% surtax on net investment income.
Opportunity Zone Investment Funds
These funds were created with the TCJA to encourage investment in distressed communities throughout the country. The opportunity zone funds are investment vehicles that receive various preferential tax benefits. Benefits include a permanent exclusion of a portion of the capital gains on the sale of the investment in the qualified opportunity fund if the investment meets the holding period requirement. If you are looking for a tax-favorable investment, you may want to consider investing in one of these funds.
Retirement Savings
Another way to lower your 2018 income is through retirement plans. Employees wishing to defer income to future years should take advantage of maximizing the amount contributed to their employer-sponsored retirement plan. For 401(k) plans, the maximum deferral for 2018 is $18,500 with an additional catch-up contribution of $6,000 for those over 50 years old as of December 31, 2018.
Maximize Above-the-Line Deductions
Health Savings Accounts (HSA). If you become eligible in or before December 2018 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2018. Simplified Employee Pension (SEP) Contribution If you have self-employed income, consider putting money into a SEP. This option is available to you even if you have already deferred the maximum amount into your employer-sponsored 401(k) plan. By contributing money to a SEP, you can typically avoid both current year federal and state taxes on the amount contributed. The maximum SEP contribution for 2018 is $55,000 and it can be funded as late as the due date of your federal tax return, including extensions. Student Loan Interest | You may be eligible to take an above-the-line deduction for student loan interest paid up to a maximum of $2,500.
Bunching deductions
With the TCJA, many itemized deductions were either eliminated or severely limited. Bunching deductions may be a way to preserve deductions that would otherwise be wasted or lost due to the higher standard deduction. The deduction for state and local taxes, and real estate taxes are limited to $10,000. If your mortgage is paid off and you don’t have any high medical expenses, your only other itemized deduction would be charitable contributions. It may be worth your while to fund several years’ worth of charitable contributions in one year to accelerate the deduction into that year, and then use the standard deduction in the subsequent years. One good way to do this is through a Donor-Advised Fund. This vehicle allows you to donate the money one year and get a tax deduction while keeping the money in the fund until you distribute it to the various charities in subsequent years.
Medical Expense Deductions
For 2018, medical expenses are only deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI), even for taxpayers over age 65. Medical expenses include health insurance premiums, Medicare premiums, amounts paid to doctors for medical care, prescriptions, etc. Unless you have a high amount of medical expenses, you most likely will not qualify for this deduction.
State & Local Tax Deduction
The TCJA limited the total deduction for state and local income taxes and real estate taxes to $10,000. If you can itemize your deductions and have not reached the $10,000 limit, you may want to consider paying your 2018 real estate taxes in December as opposed to January 2019. If you have already met the $10,000 limitation, then there is no benefit to pre-paying these taxes.
Charitable Contribution Deduction
Consider making charitable contributions before year-end either in cash or non-cash such as highly appreciated stocks. You can also make contributions at year-end using your credit card, even if the credit card is not paid until 2019. You can write a check to charity and mail it on December 31, 2018 and take a 2018 tax deduction even if the check doesn't clear your bank until January 2019. Non-cash donations valued over $5,000 (except publicly traded stock) require a written appraisal and a letter from the charity acknowledging the donation to be deductible. If you are over age 70 ½, you can make a charitable contribution up to $100,000 directly from your IRA to satisfy the required minimum distribution requirement.
Miscellaneous Itemized Deductions
Employee business expenses, investment expenses, tax preparation fees, and certain legal fees are no longer deductible. These deductions were eliminated as part of the TCJA.
Home Office Deduction
Expenses for your home office are deductible if your office is used regularly and exclusively. The deduction can be a percentage of the actual expenses or an IRS safe-harbor of $5 per square foot can be used. This deduction is only allowed to offset your self-employment income and can no longer be used as a miscellaneous itemized deduction.
Required Minimum Distributions
Don’t forget to take your required minimum distributions (RMDs) from your retirement accounts. These include your IRA, 401(k), or other employer-sponsored retirement plan. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70 ½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
Education planning
Consider funding a 529 Plan for educational purposes. There is no current year federal deduction for 529 plan contributions, but Ohio doubled the state tax deduction to $4,000 per beneficiary. In addition, 529 plan distributions can now be used for grades K-12 tuition making them even more advantageous.
Gifting
Take advantage of the annual gift tax exclusion. Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and/or estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers might also save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Although the estate tax exemption is now $11,180,000 and is indexed for inflation, there is a sunset clause after December 31, 2025. After this date the estate tax exemption will revert back to the pre-TCJA amount of $5,490,000. If you are concerned with the exemption amount, you may want to start gifting now using the higher exemption amounts.

 

Businesses

Businesses have greatly been impacted by the TCJA for 2018, including the corporate tax rate cut to a flat 21% (previously 35%), and the addition of the QBI deduction (20% business income deduction) for taxpayers other than corporations (noted above). The TCJA also expanded the small business gross receipts threshold to $25 million, which allows businesses to elect or remain eligible for various accounting methods, such as utilizing the cash method of accounting and treating inventory as non-incidental materials and supplies or to avoid the uniform capitalization rules for resellers and manufacturers.

Accelerated Depreciation
Take advantage of generous depreciation rules for assets such as computers, software, equipment, furniture, or certain property improvements purchased in 2018. Section 179 Allows you to expense otherwise depreciable property if placed in service in 2018. You may elect to expense up to $1 million of fixed asset costs (with a dollar-for-dollar phase-out for purchases greater than $2.5 million). If the cost of your §179 property placed in service during 2018 is $3.5 million or more, you cannot take a §179 deduction. Additionally, the deduction is limited to business income. Bonus | In addition to the §179 deduction, your business can also deduct first-year bonus depreciation equal to 100% of the cost of most fixed assets with a tax life of 20 years or less. Under the TCJA, the law has eliminated the requirement that eligible property must be new to qualify for bonus depreciation (if the property was not acquired from a related party). The 100% first-year bonus depreciation will remain in effect through 2022, in which the applicable percentages will then be phased-out through 2026.
De Minimis Safe Harbor Election
The “de minimis safe harbor election” (also known as the book-tax conformity election) allows businesses to expense lower-cost assets, materials, and supplies assuming the costs don’t have to be capitalized under the Code Section 263A uniform capitalization (UNICAP) rules. To qualify for the election, the unit of property cost cannot exceed $5,000 if the taxpayer has an applicable financial statement (e.g., a certified audited financial statement along with an independent CPA's report). If there’s no applicable financial statement, the cost of a unit of property can’t exceed $2,500. If the UNICAP rules aren’t an issue, consider purchasing qualifying items before the end of 2018.
Tax Credits
There are numerous tax credits which can help lessen the tax burden for a business and its owner. R&D Credit | Businesses that incur certain research and development (R&D) costs, such as wages, supplies, and contract research, are eligible for this general business R&D tax credit. Eligible small businesses, $50 million or less in gross receipts, may be able to claim the R&D credit against the employer’s payroll tax (i.e. FICA) liability. Work Opportunity Tax Credit | Businesses that hire individuals from targeted groups (i.e. qualified veterans, long-term unemployment recipients, ex-felons) are eligible for a tax credit equal generally to 40% of up to $6,000 of the individual's first-year wages paid (per employee).
Subnormal Goods
Goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, broken lots, or other similar causes may be written down and taken as a deduction, as long as you offered it for sale at a reduced value within 30 days of the inventory date. The inventory does not need to be sold within the 30-day time frame.
Accounting Method
Review your methods of accounting for tax purposes to determine if you are using the optimal methodologies to maximize tax deductions. Deducting certain prepaid items, accruing for company payroll or bonuses (must be paid within 2.5 months of year-end) and reviewing all depreciation methods are common areas to analyze.
Cash Method
Many businesses, especially service-based business utilize the cash method of accounting. These businesses should accelerate deductions into the current year by bunching expenses to the extent possible.
State and Local Taxes
We are seeing an increase in changes to state tax laws and regulations, as well as their approach to tax audits. Most states are becoming increasingly aggressive in trying to capture tax revenue from out-of-state businesses. Specific state and local tax areas to be mindful of include income tax, sales and use tax, payroll tax, and property tax.
Tax Basis
If you own an interest in a partnership or S corporation where losses may be limited due to basis limitations, consider whether you need to increase your basis in the entity to deduct a loss from it for this year.
Start-Up Expenditures
New businesses that are up and running before the end of 2018 may be able to deduct up to $5,000 of start-up expenditures, including costs paid or incurred prior to business operations commencing. Additional deductible expenditures will be deductible over a 180-month period.
Meals & Entertainment
The TCJA brought about stricter limitations on deductions for both meals and entertainment expenditures, including no longer permitting a deduction of entertainment, amusement or recreation expenses. Business activities that include a meal and an entertainment component should be broken out and tracked as separate line items, or should be purchased as separate transactions, as meal expenditures may still be 50% or 100% deductible. Businesses should consider categorizing meals and entertainment expenses into three categories: entertainment/nondeductible expenses, 100% deductible items, and 50% deductible items.
Passive Losses
To reduce 2018 taxable income, consider disposing of a passive activity in 2018 if it will allow you to deduct suspended passive activity losses.
IC-DISC
If your business has foreign sales, consider utilizing an IC-DISC. A business that has export sales and utilizes an IC-DISC can create a tax benefit in which a portion of its income is taxed at the long-term capital gains rate.
Foreign Reporting
The foreign reporting requirements are very comprehensive and complex for businesses with activities outside of the U.S. Business owners and employees who have any financial interest in, or signature authority over a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR). The Foreign Account Tax Compliance Act (FATCA) requires businesses to report and possibly withhold on payments made to foreign entities. Investments, assets, and legal entities outside the U.S. may subject the business to various reporting requirements.

These are some of the year-end steps that can be taken to minimize your tax burden. We can help tailor a customized plan that will work best for your tax planning goals. Additional ideas and information may be found in our 2018 Tax Planning Guide.

Please contact your BMF tax advisor if you would like to review any of the items mentioned, schedule a tax planning strategy session, or discuss potential implications of the various tax law changes.

About the Authors

Cindy H. Mitchell

CPA
Senior Manager, Taxation Services

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