Year-End Money Moves 2018

2018 year-end financial planning is a lot different than in previous years, because it is the first full year after the implementation of the Tax Cuts and Jobs Act (TCJA). The good news is that for millions of Americans, the new code should make filing easier. That’s because nearly 90 percent of taxpayers are likely to claim the standard deduction this year, up from 70 percent last year.

Additionally, fewer taxpayers will have to deal with the Alternative Minimum Tax (AMT), which impacted middle and higher income taxpayers from states with high income taxes and high property taxes. The new law did not repeal AMT, but it increased the amount of income exempt from the AMT to $109,000 for joint filers (up from $84,500) and $70,300 for singles (from $54,300).

That said, there are plenty of changes to confront. “Because the changes are vast, you may want to consider having your CPA/tax preparer do a projection of your 2018 taxes, while he or she has the time,” says Brenna McLoughlin, CFP® of Wealthstream Advisors. Brenna’s boss, Michael Goodman, CPA/PFS, CFP® and founder of the firm, took the proactive step to purchase costly software to understand how the new tax code would impact clients and to help inform the staff’s advice.

Short of taking a stab at your 2018 return, a good place to start is to pull last year’s returns and ask two important questions:

(1) How will my 2018 and 2019 income compare with 2017? Is it likely to be higher or lower? This estimate will allow you to make important decisions.

(2) Based on last year’s deductions, am I likely to itemize, or take the new, higher standard deduction ($12,000 Single/$24,000 MFJ/$18,000 HOH)? To determine itemized versus standard, you tally up deductions, including: mortgage interest (be mindful of new restrictions, which limit the deductibility of mortgage amounts in excess of $750,000 and home equity interest used for non-home related purposes); state and local income or sales taxes, real estate taxes, and personal property taxes up to $10,000; and charitable contributions.

Many itemized deductions of the past have been scrapped, including those for unreimbursed employee expenses; tax preparation fees; investment and management expenses; employment related educational expenses; job search expenses; theft; and most personal casualty losses (except those that resulted from a federally declared disaster area).

For those who are claiming the standard deduction or have higher income in 2018 than they are likely to have next year, the best way to reduce your tax liability is to maximize your retirement plan contributions. If you have not done so, contact your HR department to see if you can increase your contributions before the end of the year. If you are self-employed or have a side hustle, you may want to establish your own retirement plan. Most plans, with the exception of a SEP-IRA must be established (though not funded) by December 31.

Don’t despair if your income has stayed the same or dropped this year, because you may have a unique opportunity to execute a full or partial Roth IRA conversion, where you pay taxes at today’s rates, rather than wait until later in life, when you may be in a higher bracket. This may also work well for a retiree, whose tax bracket has dropped. Remember: a conversion only works if you pay the taxes due from money outside of the retirement account.

The change in itemized deductions makes the concept of “bunching” or “bundling” deductions much more important. The theory is that if you can bunch future itemized items into one year, you may be able to itemize again. The best opportunity may be with your charitable contributions.

The tax law is expected to reduce the marginal tax benefit of giving to charity by more than one-quarter in 2018, according to the Tax Policy Center, but if you give one lump sum, which represents your gifts for the next few years, you may be able to feel good while also recapturing the tax benefit. One easy way to accomplish this is by establishing a donor advised fund (DAF), which allows you to make multiple years worth of donations up front. An added bonus of DAFs is that you can contribute appreciated securities as well as cash into the account.

With all of the changes to the tax code, some advice is evergreen. Here are a bunch of tips:

Sell losers. One thing that remains consistent from prior years is to sell investments with losses in taxable accounts, which can be used to offset gains during the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years. McLaughlin notes that some people resist doing this, likening it “to admitting defeat,” but she often likes to ask, “Would you invest in that stock today?” If the answer is no, the sale is a lot easier.

If you’re going to sell something and replace it within thirty days, the new asset can’t be “substantially identical,” which is known as the wash sale rule. Avoid it by waiting 31 days and repurchase what you sold, or replace it with something that’s close, but not the same as the one you sold. For example, if you sell a managed stock mutual fund, you can replace it with an index fund. If you are selling an index fund, like the S&P 500, you could choose a different index fund, like the Russell 3000.

Take Required Minimum Distributions (RMDs). Uncle Sam requires that you withdraw money from retirement accounts after you turn 70 ½, unless you are still working. Withdrawals must occur by Dec. 31st and failure to do so, results in a whopping 50 percent penalty on the amount you should have taken. If you have multiple IRAs, you only need to take one RMD based on your age and the total value of the accounts. BUT, if you also have a 401(k) or 403(b), you need to take the RMD from each account individually. (Consult IRS.gov for more specifics)

If you don’t need the money from RMD, then consider a Qualified Charitable Distribution (QCD), which allows you to direct some or all of your RMD to the charity of your choice. You don’t get to count a QCD towards your charitable deduction, but you avoid being taxed on the money.

Tax advantage of the gift tax exclusion. You can give up to $15,000 ($30,000 with a married spouse) to as many people as you wish in 2018, free of gift or estate tax. You can also make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or dipping into your lifetime gift-tax exemption.

Fund 529 education plans. You can use the same amounts as the gift tax exclusion to fund 529 education accounts. If your state offers a tax benefit, your opportunity to take advantage for the 2018 tax year ends December 31. Additionally, you may be able to use 529 plans to pay for private elementary and high school tuition, but check with your state to confirm.

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