The legislation known as the Tax Cuts and Job Act (TCJA) made sweeping changes to the tax law. The act is complex and impacts numerous tax specializations. This column focuses on the steps that individual taxpayers can take to save money before the 2018 year ends.

In 2018, the applicable tax rates for a given level of income are generally (although not always) the same or lower than they were in 2017. The exemption deductions disappear and the standard deduction almost doubles. The new law also limits state and local tax (SALT) deduction to $10,000, brings lower cap for home mortgage interest deduction and disallows miscellaneous itemized deductions. The phaseout of itemized deductions at higher income levels disappears, while the AMT exemptions and phaseout threshold is significantly increased.  Because the standard deduction nearly doubles and many itemized deductions have been cut back or eliminated, many taxpayers who claimed itemized deductions in prior years will take the standard deduction for 2018 and in future years.  Some other miscellaneous changes worth noting include an increase of child tax credit, expansion of 529 plans, suspension of the moving expenses deduction, and time-line of alimony treatment.  The new law also creates a 20{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} tax deduction for qualified business income, doubles the estate tax applicable exclusion amount, and eliminates the ability to re-characterize Roth IRA conversions.

Tax Planning Opportunities

Harvest your loss: Now may be a good time to consider selling certain under-performing investments so you can generate a capital loss before the end of the year. This could help offset the capital gains you realize and minimize the 3.8{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} net investment income tax and .9{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} Medicare surtax.

Stack charitable contributions and/or medical expenses. You should consider bunching charitable and/or medical expenses into some years and take itemized deductions and claim standard deductions in other years; that is, accelerating or deferring expenses with discretion. A donor-advised fund (DAF) allows you to take an immediate tax deduction when you make a charitable contribution to the fund and schedule grants over the next years, thus helping you to resolve the problem of bunching.  Another big advantage of DAF is that the growth of the fund is tax free. 

More about charitable contributions: If you have reached age 70½ and want to make charitable contributions, you should consider arranging a direct transfer (limited to $100,000) from your IRA account to a qualified charitable organization. The distribution through the transfer will not be included in your gross income, and thus will help you qualify for credits and deductions limited by a high AGI level. However, such contributions are not deductible. Also, if you take itemized deductions in 2018, consider using highly appreciated securities for charitable contributions to escape taxes on the accumulated gains.

Set up or revisit your qualified tuition plan: Earnings in a 529 plan may be withdrawn tax-free if used for qualified education. The act now expands the qualified expenses and includes tuition at an elementary or secondary public, private, or religious school for up to $10,000 per year.

Pay off home equity loan:  Tax reform takes away the mortgage interest deduction for most home equity loans unless you use the loan to buy, build, or improve your home. It now makes sense to prioritize getting the home equity loan paid down first unless the deduction still qualifies, or unless the interest rate on the regular home mortgage is significantly higher.

Maximize the qualified business income deduction (section 199A):  This is perhaps the hottest topic of the tax reform. This section allows sole proprietors and owners of partnerships, LLCs, or S corporations to deduct up to 20{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} qualified business income. However, the deduction is subject to various rules and limitations. Our office can help you optimize your strategy.

Consider Investing in Qualified Opportunity Zones (QO Zones):  Qualified opportunity fund investments are a new provision in the tax reform legislation.  QO zones are low-income communities that meet certain requirements.  Investing in QO zones can result in deferral, reduction, or permanent exclusion of capital gains on disposition of investments in QO zones, given that set criteria is met.

Be sure to take required minimum distributions (RMDs): If you have reached age 70½, be sure to take your RMD from your IRAs, 401(k) plans, or other employer-sponsored retirement plans. The cost of failure to take the RMD is severe: a penalty of 50{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the RMD not withdrawn.  If you turned age 70½ in 2018, you can delay your first required distribution to 2019, however, you will have to take a double distribution in 2019.

Others:  Contribute to an IRA by mid-April of 2019 for 2018; Make HSA contributions tied to high deductible health insurance plans.  If you are eligible for December 2018, you are considered eligible for the entire year. Consider a Roth conversion if you expect to be in a higher tax bracket in future years.

Solve an underpayment of estimated tax: You can ask your employer to increase withholding for your last paychecks or simply request a flat amount of additional withholding by filing a new form W-4. Tax withheld on wages is treated as having been paid in each quarter equally; thus you can cut the underpayment penalty for preceding quarters, while increasing the last estimated tax payment for 2018, reducing the penalty only for the final quarter. Another option is to take an eligible rollover distribution from a qualified retirement plan
and withhold on the distribution.

You can pick the strategies that suit you best and do not have to make all of these moves to save a bundle.  This year is definitely unique given the numerous tax law changes.  Our professionals will help
you to make the right decisions.