...Higher-income
earners must be wary of the 3.8% surtax on certain unearned income. The surtax
is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of
modified adjusted gross income (MAGI) over a threshold amount ($250,000 for
joint filers or surviving spouses, $125,000 for a married individual filing a
separate return, and $200,000 in any other case). As year-end nears, a
taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on
his estimated MAGI and NII for the year. Some taxpayers should consider ways to
minimize (e.g., through deferral) additional NII for the balance of the year,
others should try to see if they can reduce MAGI other than NII, and other
individuals will need to consider ways to minimize both NII and other types of
MAGI.
...The 0.9% additional
Medicare tax also may require higher-income earners to take year-end actions.
It applies to individuals for whom the sum of their wages received with respect
to employment and their self-employment income is in excess of an unindexed
threshold amount ($250,000 for joint filers, $125,000 for married couples
filing separately, and $200,000 in any other case). Employers must withhold the
additional Medicare tax from wages in excess of $200,000 regardless of filing
status or other income. Self-employed persons must take it into account in
figuring estimated tax. There could be situations where an employee may need to
have more withheld toward the end of the year to cover the tax. For example, if
an individual earns $200,000 from one employer during the first half of the
year and a like amount from another employer during the balance of the year, he
or she would owe the additional Medicare tax, but there would be no withholding
by either employer for the additional Medicare tax since wages from each
employer don't exceed $200,000.
...Long-term capital
gain from sales of assets held for over one year is taxed at 0%, 15% or 20%,
depending on the taxpayer's taxable income. The 0% rate generally applies to
the excess of long-term capital gain over any short term capital loss to the
extent that it, when added to regular taxable income, is not more than the
"maximum zero rate amount" (e.g., $77,200 for a married couple). If
the 0% rate applies to long-term capital gains you took earlier this year—for
example, you are a joint filer who made a profit of $5,000 on the sale of stock
bought in 2009, and other taxable income for 2018 is $70,000—then before
year-end, try not to sell assets yielding a capital loss because the first
$5,000 of such losses won't yield a benefit this year. And if you hold
long-term appreciated-in-value assets, consider selling enough of them to
generate long-term capital gains sheltered by the 0% rate.
...Postpone income
until 2019 and accelerate deductions into 2018 if doing so will enable you to
claim larger deductions, credits, and other tax breaks for 2018 that are phased
out over varying levels of adjusted gross income (AGI). These include
deductible IRA contributions, child tax credits, higher education tax credits,
and deductions for student loan interest. Postponing income also is desirable
for those taxpayers who anticipate being in a lower tax bracket next year due
to changed financial circumstances. Note, however, that in some cases, it may
pay to actually accelerate income into 2018. For example, that may be the case
where a person will have a more favorable filing status this year than next
(e.g., head of household versus individual filing status), or expects to be in
a higher tax bracket next year.
...If you believe a
Roth IRA is better than a traditional IRA, consider converting traditional-IRA
money invested in beaten-down stocks (or mutual funds) into a Roth IRA if
eligible to do so. Keep in mind, however, that such a conversion will increase
your AGI for 2018, and possibly reduce tax breaks geared to AGI (or modified
AGI).
...It may be
advantageous to try to arrange with your employer to defer, until early 2019, a
bonus that may be coming your way. This could cut as well as defer your tax.
...Beginning in 2018,
many taxpayers who claimed itemized deductions year after year will no longer
be able to do so. That's because the basic standard deduction has been
increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads
of household, and $12,000 for marrieds filing separately), and many itemized
deductions have been cut back or abolished. No more than $10,000 of state and
local taxes may be deducted; miscellaneous itemized deductions (e.g., tax
preparation fees) and unreimbursed employee expenses are no longer deductible;
and personal casualty and theft losses are deductible only if they're
attributable to a federally declared disaster and only to the extent the
$100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical
expenses to the extent they exceed 7.5% of your adjusted gross income, state
and local taxes up to $10,000, your charitable contributions, plus interest
deductions on a restricted amount of qualifying residence debt, but payments of
those items won't save taxes if they don't cumulatively exceed the new, higher
standard deduction.
...Some taxpayers may
be able to work around the new reality by applying a "bunching
strategy" to pull or push discretionary medical expenses and charitable
contributions into the year where they will do some tax good. For example, if a
taxpayer knows he or she will be able to itemize deductions this year but not
next year, the taxpayer may be able to make two years' worth of charitable
contributions this year, instead of spreading out donations over 2018 and 2019.
...Consider using a
credit card to pay deductible expenses before the end of the year. Doing so
will increase your 2018 deductions even if you don't pay your credit card bill
until after the end of the year.
...If you expect to
owe state and local income taxes when you file your return next year and you
will be itemizing in 2018, consider asking your employer to increase
withholding of state and local taxes (or pay estimated tax payments of state
and local taxes) before year-end to pull the deduction of those taxes into
2018. But remember that state and local tax deductions are limited to $10,000
per year, so this strategy is not a good one if to the extent it causes your
2018 state and local tax payments to exceed $10,000.
...Take required
minimum distributions (RMDs) from your IRA or 401(k) plan (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. (That start date also applies
to company plans, but non-5% company owners who continue working may defer RMDs
until April 1 following the year they retire.) Failure to take a required withdrawal
can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if
you turn age 70-½ in 2018, you can delay the first required distribution to
2019, but if you do, you will have to take a double distribution in 2019-the
amount required for 2018 plus the amount required for 2019. Think twice before
delaying 2018 distributions to 2019, as bunching income into 2019 might push
you into a higher tax bracket or have a detrimental impact on various income
tax deductions that are reduced at higher income levels. However, it could be
beneficial to take both distributions in 2019 if you will be in a substantially
lower bracket that year.
...If you are age 70-½
or older by the end of 2018, have traditional IRAs, and particularly if you
can't itemize your deductions, consider making 2018 charitable donations via
qualified charitable distributions from your IRAs. Such distributions are made
directly to charities from your IRAs, and the amount of the contribution is
neither included in your gross income nor deductible on Schedule A, Form 1040.
But the amount of the qualified charitable distribution reduces the amount of
your required minimum distribution, resulting in tax savings.
...If you were younger
than age 70-½ at the end of 2018, you anticipate that in the year that you turn
70-½ and/or in later years you will not itemize your deductions, and you don't
have any traditional IRAs, establish and contribute as much as you can to one
or more traditional IRAs in 2018. If the immediately previous sentence applies
to you, except that you already have one or more traditional IRAs, make maximum
contributions to one or more traditional IRAs in 2018. Then, when you reach age
70-½, do the steps in the immediately preceding bullet point. Doing all of this
will allow you to, in effect, convert nondeductible charitable contributions
that you make in the year you turn 70-½ and later years, into
deductible-in-2018 IRA contributions and reductions of gross income from age
70-½ and later year distributions from the IRAs.
...Take an eligible
rollover distribution from a qualified retirement plan before the end of 2018
if you are facing a penalty for underpayment of estimated tax and having your
employer increase your withholding is unavailable or won't sufficiently address
the problem. Income tax will be withheld from the distribution and will be
applied toward the taxes owed for 2018. You can then timely roll over the gross
amount of the distribution, i.e., the net amount you received plus the amount
of withheld tax, to a traditional IRA. No part of the distribution will be
includible in income for 2018, but the withheld tax will be applied pro rata
over the full 2018 tax year to reduce previous underpayments of estimated tax.
...Consider increasing
the amount you set aside for next year in your employer's health flexible
spending account (FSA) if you set aside too little for this year.
...If you become
eligible in December of 2018 to make health savings account (HSA)
contributions, you can make a full year's worth of deductible HSA contributions
for 2018.
...Make gifts
sheltered by the annual gift tax exclusion before the end of the year and
thereby save gift and 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. Such transfers may 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.
...If you were in an
area affected by Hurricane Florence or any other federally declared disaster
area, and you suffered uninsured or unreimbursed disaster-related losses, keep
in mind you can choose to claim them on either the return for the year the loss
occurred (in this instance, the 2018 return normally filed next year), or the
return for the prior year (2017).
...If you were in an
area affected by Hurricane Florence or any other federally declared disaster
area, you may want to settle an insurance or damage claim in 2018 in order to
maximize your casualty loss deduction this year.
These are
just some of the year-end steps that can be taken to save taxes. Again, by
contacting us, we can tailor a particular plan that will work best for you.
Very truly
yours,
Amare
Berhie, Senior Accountant
(651)
300-4777
