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  • Writer's pictureGeoff Wells

Year-End Tax Planning – 2018 Edition

Below are a few of the key strategies we consider, some of which are new for 2018:

The Tax Cuts and Jobs Act (TCJA) is now in effect for 2018.  Major tax changes do not come very often and there is usually uncertainty with the changes.  2018 is no exception.  Even though the rules are effective in the law, the individual tax forms and interpretation of the law is still in a constantly evolving state.  

The good news is that by understanding the new tax law changes and how they affect personal income tax returns, we can implement tax-saving strategies right away for many individuals and families.  One way we can do this is by completing a year-end projection of what an estimated tax return would look like.  With this information, we can see if there is an advantage to using one or many of the different multi-year tax strategies that are available.   

Qualified Business Income Deduction – The new tax law allows certain business owners a tax deduction up to 20% for qualified business income. While the nuances and strategies are beyond the scope of this article, we certainly recommend all small business owners to evaluate this deduction in detail.

Realizing Capital Gains – For those with an after-tax brokerage account, 2018 may be the year to realize capital gains since we have had an 8+ year bull market run. Depending on your expected income tax bracket for the year, capital gains may be taken at a 0% tax rate on the federal level compared to a future tax year at 15% or more. Harvesting Capital Losses – The opposite of realizing gains, capital losses can be taken on after-tax brokerage account positions that have not performed well since purchased. Usually, capital losses are used to offset realized gains. A small portion of these losses can offset income and the losses can also be carried over to future tax years if needed. Traditional to Roth IRA Conversions – When tax planning, we can help look at both the current and future projected tax years and try and smooth out any spikes in taxable income. If there is a possibility to realize taxable income sooner at a lower rate, we recommend doing so. One way this can be done is by completing a Traditional to Roth IRA conversion, which preserves the tax-advantaged status of retirement accounts while realizing taxable income in the current year. (For example, realizing a current 12% tax rate vs. a future expected 22% tax rate) 529 College Savings Plan Contributions – Many states offer tax deductions to save for college expenses. In New York, families are able to get a tax deduction for up to $10,000 ($5,000 for an individual) for 529 contributions annually, as long as the NY state-sponsored plan is used. As an illustration, at a sample tax rate of 6.45%, this would give a deduction of $645 for college expenses many parents expect to pay anyways. This strategy works for grandparents funding college costs as well, though grandparent 529 withdrawal timing needs to be planned carefully. Health Savings Account (HSA) Contributions – Many employers are switching to high-deductible health care plans that share medical costs between the employer and an employee. With these types of plans, families are able to contribute $6,900 ($3,450 for an individual) into to an HSA account for 2018 and get a tax deduction for the contribution. As such, pre-tax money goes into an HSA and can be used tax-free for future medical expenses. If not specifically deducted from a paycheck monthly, HSA contributions for 2018 can be made up until 12/31/2018. Qualified Charitable Distributions (QCD) – For most people, the new tax law eliminates the tax deduction for small charitable contributions. For individuals over 70.5 years old, there is still the provision that allows direct charitable contributions from IRA accounts. By completing an extra step of distributing from an IRA account, future charitable contributions can remain tax-deductible up to the maximum limit of $100,000/year. This means you can still donate on monies you don’t pay taxes on. Charitable Gift Bunching – For individuals under 70.5 and not eligible for QCDs, combining planned giving into a single tax year instead of spreading it out over many tax years could allow a tax deduction on a portion of the gifts. A Donor Advised Fund (DAF) is a way to bunch gifts while still controlling how that money is given out over time. Backdoor Roth IRA Contributions – Still in place for 2018 is the Backdoor Roth IRA contribution. Regardless of income, if an individual does not have a pre-tax IRA account, they can complete the two-step process to make a Roth IRA contribution for the year ($5,500 for those under 50 years old and $6,500 for those 50 and older in 2018). First, a non-tax-deductible contribution is made to a Traditional IRA. Second, a Traditional IRA to Roth IRA conversion is completed. As long as there are no gains in the Traditional IRA account, no taxes should be owed on the conversion amount. Bottom Line These are just a few of the variety of tax planning items that we consider when evaluating a clients’ financial plan and investment management approach. If you would like to see if there is an opportunity to save with savvy tax planning before year-end, please reach out to us.

** We always recommend consulting your tax advisor to make sure these strategies fit into your specific situation. We are happy to work together as a team with them to come up with the best available solutions.


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