A great deal has happened, particularly with respect to income taxes, since autumn last year. Not only did Congress pass a substantial overhaul of income tax but further changes are currently in the works. In addition to some amplification by the IRS of those changes, we also have the annual IRS updates which will affect our planning for 2019. Although we can safely complete our planning for 2018, we will need to be flexible and ready for potential changes to our planning for 2019.
The end of year tasks we face begin with an analysis of what you earned during 2018 and what you expect to earn in 2019. Typically many taxpayers seek to maximize earnings where you have deductions to set off against them. This year is somewhat different given the larger standard deduction, the elimination of the personal exemption and various miscellaneous deductions, as well as the cap on the federal deduction of certain state taxes paid.
One often overlooked tool for taxpayers is maximizing your tax deferral through contributions to qualified retirement plans. It can be much more than simply contributing the maximum amount to your company’s 401(k) plan – you may also be able to contribute to your own IRA or an IRA for a non-working spouse. If you have a small business, much larger amounts could be deferred using a SEP IRA or, for very high income earners, a cash balance plan or defined benefit plan. Taking full advantage of the deferral options available to you not only reduces current taxable income but may help a business qualify for the QBI deduction in addition to saving for retirement.
With the strong market results experienced again this year, it is possible that you will have limited losses to deduct but those losses may be useful to set off against the very likely gains you have seen and may wish to realize. As always, realizing gain to the extent of losses will keep those gains out of reach for the taxing authority. Apart from the benefit of setting off realized gains, losses including your loss carry-forward if any, can be beneficial in reducing your overall tax burden.
Another area of consideration is gifting in both its charitable and non-charitable forms. Charitable gifts generally may be deducted to some extent and this will help reduce taxable income. Estate planning may benefit from transfers to family members as well, although the estate tax impact will be negligible for most taxpayers and no income tax impact will apply. The primary benefit lies in helping less well off family members to meet their goals.
In each case - gifting and realizing investment gains and/or losses – it is necessary to evaluate your anticipated tax burden, make a decision and act on it before the end of the year. There is somewhat less time pressure if you are considering maximizing your contributions to a 401(k), IRA or other qualified retirement plan since certain contributions made prior to April 15, 2019 may be counted towards your 2018 limits and tax year.
A one-time advantage available for your 2018 tax year is the drop in the threshold for deducting medical expenses. The threshold for 2018 is 7.5% of your adjusted gross income so that medical expenses in excess of that threshold amount will be deductible. This is significantly better than the recent threshold requirement of ten percent of AGI, which kicks in again for 2019. You may wish to accelerate medical spending into the remainder of 2018 to take advantage of this temporary break. Note, however, that the medical expense deduction falls within the itemized deductions that won’t benefit you unless your combined deductions exceed the new, higher standard deduction threshold.
The bottom line here is to understand your finances, consult with your adviser and accountant, and get a solid plan in place to make the most of your situation. That process won’t be complete without an assessment of withholding and/or estimated taxes for 2019. To that end, and also to help inform those end of year decisions, we will look next at several tax law changes for 2019 that will likely affect your planning.
Tax changes for 2019 include:
A five hundred dollar increase in the contribution limits for 401(k) and 403(b) plans, raising total deductible annual contributions to $19,000, also applies to participants in the Thrift Savings Plan and some 457 plans as well. IRA contributions have likewise been increased by five hundred dollars to $6,000 annually. However, the catch-up contribution for older workers – over age 50 – remains unchanged at an additional $1,000 per year. These changes allow for you to plan for a bump to your contributions in qualified plans.
Income tax brackets shifted upwards slightly with the top of the lowest, ten percent bracket, moving to $9,700 for single taxpayers and $19,400 for married persons filing jointly. The higher brackets experienced similar small adjustments upwards with, for example, the twelve percent bracket topping out at $39,750 for singles and $78,950 for married filing jointly and the twenty-two percent bracket going to $168,400 and $84,200 for married and individual taxpayers respectively. These changes should have little impact on your withholding or total tax liability, however.
Meanwhile, the standard deduction for married persons filing jointly increased slightly to $24,400 and for single persons it increased to $12,200.
Taxpayers with qualified business income will see a slightly higher threshold for 2019, allowing them to take advantage of the twenty percent deduction where total income falls at or below that threshold. For married taxpayers filing jointly, the threshold increases by $6,400 to $321,400 for 2019 while unmarried taxpayers will see an increase to $160,700.
Finally, with respect to the estate and gift tax, the annual gift tax exclusion amount remains at $15,000 for each donor-recipient combination while the unified credit exclusion amount increases to $11,400,000. As a practical matter the number of federally taxable estates will fall to near zero, particularly in view of the portability of the exemption and employment of various estate planning techniques.
Understanding these changes helps you to determine timing of deductions, planned contributions to qualified retirement plans, withholding requirements and more. These also make planning work better for you and your goals.
George Chamberlin & Mentor RIA Consulting © 2013-2018