The Financierge


2018 Year-End Tax Planning Strategies

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Dear Valued Clients and Friends,

The U.S. Constitution (including 27 amendments) has 7,591 words, Tolstoy’s War and Peace has 587,287 words, the Bible about 800,000 words, and the U.S. Tax Code has an estimated 4,000,000 words. If the average adult reads at a speed of 300 words per minute, it would take about 25 minutes to read the entire U.S. Constitution, 33 hours to read War and Peace, 89 hours to read the Bible, and over 222 hours to read the U.S. Tax Code. Factoring in reading time, an average comprehension rate of 60%, and an increasingly complex tax system, it’s no wonder why Albert Einstein said, “The hardest thing in the world to understand is the Income Tax.”  In this issue of the Financierge, we unpack some of the U.S. Tax Code and provide you with some of our 2018 year-end tax strategies and perspectives.

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2018 Year-end Tax Planning Strategies

Thanks to the Tax Cuts and Jobs Act (TCJA), you may owe less federal tax in 2018 than in prior years. On the other hand, while the TCJA generally lowered and expanded certain tax brackets and rates, it also included provisions that increase income tax by eliminating or suspending certain deductible items. Depending on your individual situation, it may be worth looking at deferring or accelerating your income and expenses to reduce your taxes. Below are some 2018 year-end tax strategies to consider:

Maximize Your Retirement Plans – Whether you have access to a company-sponsored retirement plan, you own small business, or you are self-employed, set up the right plan and contribute the maximum amount allowable. 401(k) plans allow you to contribute a maximum of $18,500 and another $6,000 catch-up if you are over age 50.  A company match makes it even more beneficial and helps the company reduce taxable income while possibly increasing employee performance and retention.

Contribute to an IRA – Depending on your income, you may be able to get a tax deduction for your contribution to a traditional Individual Retirement Account (IRA) of up to $5,500 for those age 49 and under, and $6,500 for those age 50 and older. Your IRA deduction may be limited if you contribute to a company-sponsored retirement plan (like a 401(k), the type of income, and the amount of income. For 2018, if you participate in any company retirement plan, your ability to deduct your IRA contribution phases out if you have between $63,000 and $73,000 of adjusted gross income (AGI) and are a single filer, or $101,000 and $121,000 if filing jointly or if you are a qualified widower. The deduction is phased out between $189,000 and $199,000 of adjusted gross income for married filing jointly when one spouse is a company retirement plan participant. Note: you must have earned income to make an IRA contribution – for example, investment income does not count but rental income does. Also, a Roth IRA does not get a tax deduction. Even if you don’t qualify for a contribution, you may still be able to make a non-deductible contribution. You have until April 15, 2019, to make a contribution for 2018.

Sell Depreciated Holdings – For those who have depreciated holdings, you might want to consider selling these positions and using the losses to offset taxable gains.

Manage Your Marginal Tax Rate – Watch the tax rate you pay on the next dollar of income you earn as you move to higher income brackets with higher taxes. For example, it might be better to defer income like bonuses, self-employment income, retirement plan distributions, and U.S. T-Bill income until next year.

Source: IRS.com

Alternate Years Between Standard and Itemized Deductions – You may have itemized in the past and now the standard deduction is a better choice.

Source: IRS.com

One option may be to alternate every year between the standard deduction allowance and itemized deductions to get the greatest deduction. This can be accomplished by bunching expenses in one year together. For example, if you bunch expense items like charitable contributions, medical expenses, property taxes, and mortgage interest into one year, you may be able to get a higher itemized deduction.

Bunch Charitable Giving – It may be helpful to combine your charitable deductions every other year to exceed the new higher standard deduction. If you want to get the deduction but haven’t decided who or when you want to distribute, you can contribute to a donor-advised fund (DAF) and decide later. Also, deductions for cash donations to public charities has increased to 60 percent of adjusted gross income. One other idea to keep in mind is that you can make gifts to charities, donor advised funds, charitable remainder trusts, and family foundations with appreciated assets. For example, you can gift stock with high gains instead of selling them, paying taxes, then making a donation. It’s a win-win for you and the charity.

Bunch Medical Expenses – This is the last year you can deduct medical expenses that exceed 7.5% of your adjusted gross income. For 2019, the threshold will rise to 10% so it may be worthwhile to take advantage of the lower limit.

Distribute Your Roth IRA Wisely – Roth IRA withdrawals are tax-exempt and it may help you avoid jumping to a higher tax bracket versus other income alternatives. Also, if you are getting Social Security before your full retirement age, it may prevent an increase in taxable income as a result of the Social Security earnings test.

Give a Gift – Besides making you feel good, you can give a gift of up to $15,000 per person without paying a gift tax. As an example, you and your spouse could give your children and/or your grandchildren $30,000 each into their trust, IRA ($5,500 limit each), 529 Plan ($75,000 one-time limit each), or you can make an unlimited gift directly to educational institutions and/or medical facilities.

Harvest Tax Losses – Consider harvesting losses from your portfolio to offset capital gains realized in your investment portfolio. (We automatically do this where appropriate for clients.)

Donate Your RMD – If you are age 70 1/2, you may be able to make a direct donation to a qualified charity from your retirement account. The required minimum distribution (RMD) will still count, but the donation will be excluded from taxable income. Remember you will not be able to also use this for a charitable deduction.

Accelerate Divorce – While we always encourage reconciliation, once you have decided that divorce is the only choice, it might be worth considering before year-end as the payer of alimony will no longer get a deduction on their tax return, and the recipient will no longer have to include the alimony as taxable income.

Pay Yourself, or Not – If you are an owner of an S corporation, make sure you pay or defer compensation by 12/31.

Review Trust Distributions – You should review distributions of income from trust accounts and estate accounts to lower your tax liability.

Source: IRS.com

Estates and trusts are taxed at the highest income tax rate (and a lower threshold at which the 3.8 percent Medicare surtax applies). Therefore, it may be worth distributing income to beneficiaries with a lower income tax rate.

Spend FSAs – If you have a healthcare Flexible Spending Account (FSA), you should review spending it before the year-end “use-it-or-lose-it” provision. Some employers may give you the option to carry it over for up to $500 on a year-to-year basis or utilize a 2 1/2 month grace period the following year, nevertheless, you should make sure you spend it.

Contribute to a SEP IRA – A Simplified Employee Pension Individual Retirement Account (SEP-IRA) is an employer-sponsored retirement plan that allows you as a business owner (0 – 5 employees) or if you are self-employed, to contribute up to 25% of your taxable income each year to a limit of $56,000 for 2018. It is also a strategy if you are employed and have a business on the side. You will have up to April 15, 2019, to complete the contribution.

Review Estate Planning – It’s also important to remember that most of the provisions of the TJCA will be temporarily in effect from 2018 through 2025. For that reason, it is important to review and take advantage of estate planning as the TCJA substantially increased the unified gift ($15,000 per person) and estate tax exemption ($11.18M per person), as well as the generation-skipping transfer tax exemption ($11.18M per person).

Make an Advance College Payment – You can pay for 1st quarter college classes by December 31st. If it is for you, you may be eligible for a Lifetime Learning Credit of up to $2,000. If it is for your child, you may be eligible for an American Opportunity Tax Credit up to $2,500 for the first four years of college.

These are only a handful of year-end tax strategies. Please reach out to us or your CPA to see what alternatives are right for you.

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As a holistic and comprehensive wealth management firm, not only do we help grow and protect your wealth, but we also help with all aspects of family wealth, business and legacy planning through our Financial Concierge Services platform. Some of the services provided by our platform include investments, retirement and income planning, estate planning, business planning, real estate, risk management, insurance, lifestyle management, tax planning and filing, accounting, and family office services.  Please reach out with any questions, comments, or if there is anything we can do to serve you.

Thank you for your time and from all of us at The Bahnsen Group, we wish you a very Merry Christmas and a prosperous 2019.

Warm and best regards,

Don B. Saulic, CFP® CPA

Partner, Private Wealth Management

dsaulic@thebahnsengroup.com

Select Financierge Topical Index (by Publish Date)

Business Planning

Business Entity Structures and New Tax Law Considerations (Aug 20, 2018)
Five Charitable Planning Perspectives to Know Before You Sell Your Business (Aug 20, 2018)
Two Estate Planning Tips for Your Businesses (Aug 20, 2018)
Four Strategies to Preserve Your Business’ Future (Aug 20, 2018)

College Planning
Five Ideas about 529 College Savings Plans (Nov 2, 2017)

Charitable Planning
Twelve Charitable Planning Ideas to Reduce Income Taxes in 2018 (Feb 14, 2018)
Five Charitable Planning Ideas (Nov 20, 2018)

Estate Planning
Five Annual Estate Planning Tasks (Nov 2, 2017)
Four Components of a Wealth Legacy Plan (Nov 20, 2018)

Investment Planning
Dividend Stock Investing (Feb 14, 2018)

Lifestyle Planning
Six Items to Keep in Your Vault (Nov 16, 2017)
Twelve Proactive Tips to Fight Identity Theft (Nov 16, 2017)
Twelve Ideas to Guard Your Family in a Digital World (Nov 16, 2017)
Is Your Lifestyle Balanced and in SHAPE? (Nov 20, 2018)

Real Estate Planning
Four Points to Ponder Before Buying or Leasing a Home (Jun 22, 2018)
Six Considerations About Mortgages, Refinancing and Taxes (Jun 22, 2018)
Five Elements of Reverse Mortgages (Jun 22, 2018)
Four Perspectives to Consider in Deciding to Move to a State with Lower Taxes (Jun 22, 2018)

Risk Management and Insurance Planning

Starting Social Security Benefits – Ready, Set, Hold!? (Nov 2, 2017)
Nine Considerations to Maximize Social Security Benefits (Nov 2, 2017)
Lifestyles of the Affluent and Exposed (Nov 16, 2017)
Eight Benefits of Health Savings Accounts (Mar 16, 2018)
Seven Ideas for Life Insurance (Mar 16, 2018)
Six Considerations About Long-Term Care Insurance (Mar 16, 2018)

Retirement Planning

Starting Social Security Benefits – Ready, Set, Hold!? (Nov 2, 2017)
Ten Things to Know About IRAs and Saving for Retirement (Feb 14, 2018)

Tax Planning
Twenty New Tax Reform Bill Changes (Feb 14, 2018)

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The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.