As you’re settling in for the holidays, and taking shelter from the winter weather with a warm fire and mug of cocoa, don’t forget to take one last look at your tax planning opportunities before the end of the year. The Tax Cuts and Jobs Act (TCJA) made major changes to our tax system, many of which provide opportunities to minimize your taxes, if you act in time!
Below are several planning opportunities to consider before the year is out.
Tax Gifts for Individuals
Tucked under the tree are some shiny deductions that you don’t want to miss:
- The standard deduction has increased to $12,000 ($24,000 for joint returns), while certain itemized deductions are now limited. The likely result will be that fewer taxpayers will benefit from taking itemized deductions over the standard deduction. There is an opportunity, however, for those who annually donate to charities, but generally would not exceed the standard deduction with their charitable donations and other itemized deductions. To maximize your deductions, consider “bunching” your charitable donations to give twice or more in alternative years – e.g. donate twice in even years and donate nothing in odd years.
- For 2018, taxpayers can deduct unreimbursed medical expenses in excess of 7.5% of adjusted gross income. This threshold increases to 10% next year. Consider scheduling your medical appointments and purchasing your medical devices by December 31, 2018 to increase your deduction for 2018.
- Before the TCJA, the first $5 million of gifts made were exempt from the estate and gift tax. The TCJA doubled this exemption to $10 million through 2025. Consider revisiting your gifting strategy and estate planning to maximize the benefit to your loved ones.
- Pre-TCJA, alimony payments pursuant to a divorce agreement were deductible by the payer and taxable to the recipient. The TCJA eliminated the deduction (and the corresponding income inclusion) for divorce or separation agreements that are signed after December 31, 2018. Make sure the terms of your agreement considers the impact of this change.
- Consider accelerating or deferring your capital gains to minimize your taxes. Your opportunities will depend upon your personal situation such as availability of capital losses, tax bracket, and other deductions. Talk to your tax advisor to ensure that you make the best decision for your situation.
Tax Gifts for Businesses
The TCJA sprinkled some holiday joy on businesses as well:
- The TCJA bestowed a tax break for corporations as well as pass-through entities (i.e. S corporations, partnerships, and sole proprietorships). The corporate tax rate dropped from a maximum of 35% to a flat 21% while owners of pass-through entities were granted a potential 20% deduction (QBI deduction) on their pass-through income. Pass-through owners with $157,500 or less of taxable income ($315,000 if filing a joint return) are not subject to any limitations. For pass-through owners with more than $157,500/$315,000 of income, the deduction is subject to certain limitations, including a limitation based on the wages and fixed assets of the business. Businesses need to evaluate whether a conversion to another form of business would be optimal. For instance, business owners that operate as a sole proprietorship often do not have payroll. Such businesses that generate more than $315,000 in net income may not be entitled to the 20% QBI deduction due to the limitation based on wages of the business. Converting the business to an S corporation may provide a significant tax deduction for that business income.
- The TCJA granted a 100% depreciation deduction to new purchases of machinery and equipment. The deduction also applies to used machinery and equipment as long as such items are new to that taxpayer. Consider accelerating the purchase of such equipment by December 31, 2018 to take advantage of the deduction for 2018.
- If you are inclined to spread the holiday joy, consider implementing a cash balance retirement plan. A cash balance plan can offer flexibility with annual contribution funding and can result in significant tax deductions.
Contact Your Tax Savings Helpers
These are just a few of the most common tax strategies to consider before the end of the year. The Barnes Dennig Tax Team would be happy to discuss these and other options with you. Contact us here, or by calling 513-241-8313, in order to see how your specific tax situation could be a gift waiting to be unwrapped.
Happy Holidays and Happy Tax Savings!!