Your 2018 Year-End Tax Planning Checklist

Now that fall has arrived in Charlotte (thank goodness!) and before the rush of November and December arrive, we thought this might be a good time to highlight year-end tax planning. While we could touch on all aspects of your financial planning you might revisit annually, this article will be focused on income tax and health care planning items that are sensitive due to their December 31st or April 15th deadlines. We will describe a few items that lend an explanation, and then we will follow with a high-level checklist.

You might remember the tax law which was signed into legislation last December. The daily headlines of “doubled standard deduction, enhanced child tax credit, no exemptions, lower rates and fewer brackets, certain limits on itemized deductions,” may be a bit foggy now that 10 months have passed. Mary Lou and Phillips wrote a great article with the details summarized in  A Summary of The Tax Cut and Jobs Act of 2017.

This new tax law will most likely affect the total tax you pay for the 2018 tax year; we hope most will find themselves owing a little less tax or about the same. Please note that your employer has adjusted your withholding in 2018 based on the new lower rates, so it may not be that you see your savings in the form of a refund; it could be that your tax benefit has been received over the past 9 months in the form of a slightly higher paycheck. You might have decided to just see how this first year with the new tax law goes and regroup in 2019. Or, your CPA might already be running tax projections for you. If you are on the fence, we hope the following will help you decide how much planning you would like to do before year-end.

Your Charitable Donations:

With the doubling of the standard deduction and limit on state income and real estate taxes, you may no longer need to itemize your deductions. Said another way, the new standard deduction may be higher than the total of your allowable itemized deductions. You can calculate your itemized deductions roughly by adding the following:

If your filing status is:

• “single” and the above amount is less than $12,000 or
• “single” and you are age 65 or older and the above amount is less than $13,600 or
• “married filing jointly” and your above total is less than $24,000 or
• “married filing jointly” and one of you is 65 or older and your above total is less than $25,300, or
• “married filing jointly” and you are both 65 or older and your above total is less than $26,600,

then you will probably be taking the standard deduction. This is perfectly ok, but in order to gain greater benefit from your charitable contributions and real estate tax, you might want to consider “bunching” your deductions (acceptable at any age) or an IRA QCD (for those over age 70.5). Mary Lou describes these options in her article Tax Deduction “Bunching” – The Tax Cuts and Jobs Act of 2017.

Your Capital Gains:

Not much has changed regarding tax on realized capital gains. It is still a good idea to evaluate your year-to-date realized gains and see if any gains or losses could be taken this year. Here is why:

There is a window to pay a 0% long-term capital gains rate if you fall in the lowest tax bracket or just shy of the second bracket. These brackets are based on your taxable income*** (which is after deductions are applied). If you happen to fall under $77,200 of taxable income filing jointly or under $38,600 of taxable income filing single, you might be able to take some gains at a 0% rate. If you fall above these limits, your long-term capital gains rate will be 15% until taxable income exceeds $478,999 filing jointly or $425,799 filing single.

If you are a Bragg client, we have an Investment Policy Statement for you on file, where we discussed and decided upon an annual realized gain tolerance. Your Portfolio Manager watches this amount and works to stay below it all year. Mutual funds can also pay out capital gain distributions in the fourth quarter. If you would like to know where your portfolio stands and what to expect, please don’t hesitate to call us to discuss. And, if you are not a client of Bragg, we recommend that you ask your Investment Advisor if they have a target on file for you and share this with your CPA.

Checklist

Gifts (Charitable and Individual):

• Consider “bunching” charitable contributions or real estate tax if you are taking the standard deduction this year. Then, consider if it’s best to send cash or appreciated stock to your charity.
• If you are over age 70.5 and have a traditional IRA, consider the QCD option for sending gifts to charity directly from your IRA distributions.
• Charities should receive your gift by 12/31/2018 for it to be counted on your 2018 tax return. If you are planning to gift stock from your taxable account at Bragg, we recommend initiating this request by the first week in December to allow plenty of time.
• If you gift to individuals, the annual gift tax exclusion has gone up to $15,000 per person in 2018. This is an “use it or lose it” exclusion, so be sure to send gifts for receipt prior to 12/31/18 if you intend to utilize this in 2018. Also, remember that assets gifted to individuals during your lifetime retain their original basis.  Assets inherited at death receive a “step-up” in basis at death. So, it’s worthwhile to study which assets to give away during your lifetime.
• If you would like to make a gift to a 529 plan and utilize the annual gift tax exclusion amount, the gift must be deposited in enough time to be recorded on a 2018 statement.
• If you took a qualified distribution from a 529 plan this year, then make sure the expenses are paid by 12/31/18.

Taxes:

• Consider the realized capital gains of any taxable accounts. Are you close to the thresholds described in the “Your Capital Gains” section above? Or, has your CPA advised you to limit gains from your investment portfolio, if possible, due to other income incurred this year?
• Tax Loss Harvesting—If you sell assets for tax loss harvesting (to offset gains) but want to maintain exposure to that asset, be sure you wait more than 30 days before re-purchasing the asset to avoid the wash-sale rule.
• Did your CPA recommend that you pay quarterly estimated tax payments this year? If so, have you made them? If not, can additional withholding be taken from your paycheck or IRA distribution to allow for this oversight?  This is to prevent an underpayment penalty.
• Are you close to the MAGI** threshold of $200,000 (single) or $250,000 (married/joint)? Keep in mind this is where the additional 0.9% tax on earned income and 3.8% tax on net investment income starts. Consider deferring income recognition if possible.
• If you are self-employed or receive irregular income from real estate or other sources, we strongly recommend working even more closely with your CPA to determine the impact of the tax law changes as applied to your specific circumstances in the year 2018.

Retirement Plans:

• IRA or Roth IRA contributions—Plan to make 2018 IRA contributions prior to April 15, 2019.
• Employer 401(k) and Other Retirement plans—Check your year-to-date contributions. Are you on track to maximize your allowable deferral to these plans?  Each employee can contribute $18,500 (plus an additional $6,000 catch up contribution if you are age 50 or older.)  If you aren’t on track to maximize, can your cash flow allow for moving closer to this target over time? If you are already maximizing this easily, there are ways to contribute additional funds on an after-tax basis.
• Consider a Roth Conversion if you are in a lower bracket than anticipated in future years.  Note: If you are over age 70½, you can still convert to a Roth IRA but you must also take your RMD for that year. Read more about Roth IRAs
• Have you taken your IRA Required Minimum Distribution? This applies if you have an IRA and are over the age of 70½. If your IRA is at Bragg, we have a process to reach out to you and make sure these distributions are completed by year-end.

Health Care Accounts and Benefits:

• If you have a Flexible Spending Account through your employer, are you on track to use the balance by the required date according to your plan?
• If you are contributing a Health Savings Account, are you on track to maximize your savings this year?
• Watch for your employer’s 2019 open enrollment for health care and other benefits, which often happens sometime in the Fall.
• If you have healthcare through ACA (Affordable Care Act), have you considered whether the income you reported to ACA is in line with your actual income expected by year-end?
• If you are on Medicare (Parts B and D), 2019 open enrollment dates are October 15 through December 7, 2018. Our partners at SHIIP (Seniors’ Health Insurance Information Project) have shown us how valuable it is to re-evaluate your prescription coverage. Check to make sure your prescriptions have not changed tiers and that the insurance company hasn’t changed pricing.
• Are you close to the income amounts below, which might mean an increase in Medicare Part B premiums in the year 2020? If so, consider whether delaying income to 2019 is a viable option.

The standard Part B premium for 2018 is $134.00. If you’re single and filed an individual tax return, or married and filed a joint tax return, the following chart applies to you:

If you’re married and lived with your spouse at some time during the taxable year, but filed a separate tax return, the following chart applies to you:

As we mentioned, this is not meant to be an exhaustive list of all items to consider, yet a list of the most common tax items (and, a few health care options) that may be within your control. Please reach out to us at Bragg with any questions or if you would like to discuss further.  We will also advise that you work with your CPA to run tax projections before implementing any significant changes.  If you would like a more comprehensive list of questions to consider regarding your overall financial health and planning, please see the article Financial Planning 101

Definitions:

*AGI (line 37 on your 2017 Form 1040) is gross income less certain adjustments. AGI includes all taxable income, including wages, bonuses, self-employment income, taxable interest, dividends, capital gains, retirement distributions, annuities, rents and royalties, taxable social security income, alimony received (with agreement prior to 2019), etc.  The most common adjustments that reduce your AGI include one half of self- employment tax paid, alimony paid (with agreements prior to 2019), pre-tax retirement/HSA plan contributions, student loan interest, and certain losses. Back to top

**MAGI then adds back to your AGI certain deductions from above. Back to top

***Taxable Income (line 43 on your 2017 Form 1040) is AGI less Deductions (Standard or Itemized). Back to top

Disclaimer: We are happy to share these ideas with you. Please know we do not practice law and we are not attorneys. We are happy to partner with you and your attorneys to help you accomplish your goals.