THE WHALEN GROUP
INDIVIDUAL TAX ISSUES
Individuals who are 70 ½ years of age or older in this calendar year must take a Required Minimum Distribution (RMD) from their IRA by December 31st. There is a 50% penalty tax for forgetting this provision. The only exception to this rule is the first year you turn 70 ½ you may wait until April 15th of the following year; however, you must make two distributions in that next year if you use this delay of distribution.
PLANNING TIP: Take advantage of a charitable break for IRA owners that’s now permanent in the law. Individual’s 70 ½ and older can transfer as much as $100,000 annually from their IRAs directly to a qualified charity. If married, you and your spouse can give up to $100,000 each from your separate IRAs. The benefits here are: 1) This distribution also qualifies toward your RMD requirements, 2) This distribution is not taxable to you, 3) This amount of IRA is forever removed from future income and estate tax, and 4) The charity of your choice benefits from your generosity. This planning is a WIN, WIN, WIN, WIN, when used properly, remember the distribution must go from the IRA directly to the charity you cannot receive the funds and then write a check to the charity for this to work. All IRA account custodians will have the necessary forms. NOTE: This provision is just for IRAs, therefore, if you have 401Ks, 403Bs 457plans, pension, profit sharing or other qualified plans you must transfer the funds to an IRA rollover account first then directly transfer to the charity.
Higher- income earners had the top marginal rate reduced from 39.6% to 37%, however, the new Tax Cuts and Jobs Act did not eliminate the surtax of 3.8% 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 couple filing a separate return, and $200,000 in any other case).
PLANNING TIP: Long-term Capital Gains are most likely the issue to get the surtax, many taxpayers that normally have adjust gross income under $250,000 do not experience the surtax until they have a large long-term capital gain tax. One way to either reduce or eliminate the surtax is to consider an installment sale. Example: You sell a piece of land for $110,000 with a basis of $10,000, therefore, you have a gain of $100,000, you could spread the gain over two years by receiving half this year and the balance next year, this is especially good towards the end of the year. Now let’s further assume your joint adjusted gross income is $200,000, by spreading the $100,000 gain over two years ($50,000 this year and $50,000 next year) you would not experience the surtax of 3.8% at all.
Individuals who must pay estimated tax and need to take RMD’s (required minimum distributions) from retirement accounts or any IRA distributions can elect to make up to 100% of the distribution go to income tax withholding, this possibly eliminates the need to pay estimated tax installments using Form 1040-ES. This is especially effective if you take the distribution near year end as the IRS considers the withholdings as if it had been timely withheld throughout the year.
Long-term capital gain from sales of assets held over one year and qualifying dividend 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, it is not more than the “maximum zero rate amount “ (e.g., $77,200 for a married couple $38,600 for single filer). Remember to take in to account any capital loses that can reduce net long-term capital gains in the planning process. The other long-term capital gains rates are: Married Filing Joint Returns (MFJ) $0 – $77,200 no tax, $77,201-$479,000
15% tax on gain and over $479,000 capital gains are tax at 20%. For single filers $0 – $38,600 no tax, $38,601 – $425,800 15% capital gains tax and over $425800 capital gains are taxed at 20%.
PLANNING TIP: Zero-percentage-rate gains and dividends produces increase adjusted gross income (modified adjusted gross income) which can cause more of your social security to be subject to income tax.
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. Changes in filing status, loss of child deduction and or child credits, etc., are some examples that could affect this type of planning.
PLANNING TIP: Many employers are on a fiscal year and will allow you to take your year end bonus in December or January which allows you to take advantage of income shifting.
If your IRA investment portfolio has suffered and you think a ROTH IRA would be better than consider converting your traditional-IRA into a ROTH IRA if eligible to do so. NOTE, keep in mind that doing so will increase your adjusted gross income and may reduce tax breaks that geared to AGI or MAGI (modified adjusted gross income).
Itemized deductions new rules beginning in 2018 the IRS estimates that approximately 95% less taxpayers will qualify to itemize deductions, this is due in large part to the new standard deduction amounts, $24,000 for joint filers, $12,000 for single filers, $18,000 for head of household filers and $12,000 for married filing separately. In addition no more that $10,000 of state and local taxes may be deducted (this includes real estate tax) Miscellaneous itemized deductions subject to the 2% of AGI have been eliminated, (employee business expenses, investment advisor fees, legal fees, tax preparation fees, special clothing cost, union and professional dues, etc.). Giving cash to public charities are now deductible to the extent of 60% of AGI. We were able to use the ” bunching strategy” in the pass, however, it may become more useful now that we have the higher standard deduction. Bunching itemized deduction examples: paying off medical expenses using a no or low interest credit card, making two years’ worth of charitable contributions (consider Donor Advised Funds) 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. The idea here is to bunch your itemized deductions from one year to the next, you may only get to itemize every other year if you are otherwise boarder line.
FSA and HSA 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 (HAS) contributions, you can make a full year’s worth of deductible HAS contributions for 2018.
Review your investment portfolio for possible tax savings adjustments. If you are considering taking profits in your portfolio then make sure that you balance gains and losses to reduce the tax. Now is the time to reduce underperforming, investments as an offset against the winners. Remember losses offset gains dollar for dollar, any excess losses are deductible up to $3,000 the balance must be carried forward until used up or your death whichever comes first.
PLANNING TIP: If you hold under performing stock positions and have an unrealized loss, you could sell the stock experiencing a capital loss and then repurchase the same stock after 31 days and avoid the WASH LOSS rules. If repurchased prior to 31 days then your stock price gets adjusted and no loss is recognized.
Gifting to avoid gift tax Consider making gifts sheltered by the annual gift tax exclusion before
the end of the year if doing so may save gift and estate taxes. The exclusion applies gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. There is an unlimited transfer directly to educational institutions for tuition (not considered a gift), or unlimited transfer to medical care providers (not considered a Gift). You cannot carryover 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.
PLANNING TIP: Many may prefer CASH, however, consider appreciated stocks, mutual funds or other appreciated assets. Remember the transfer of these assets are transferred at FMV so keep the FMV at $15,000 or under. The basis of the asset transfers as well, example you own a stock position that has a market value of $15,000 with a cost basis of $5,000 for a gain of $10,000, if you transfer the position to a individual that is in the ZERO capital gains bracket the $10,000 gain would not be taxable. Remember there three capital gains brackets this year 0%, 15%, and 20% depending upon your adjusted gross income.
Energy credit still available If you install solar panels you can claim a credit of 30% of the total cost. For solar energy systems installed in a residence, the full credit applies through 2019 and then phased out until it ends after 2021.
Divorce Tax reform changes the alimony game. The Tax Cuts and Jobs Act (TCJA) eliminates tax deductions for alimony payments that are required under post 2018 divorce agreements. More specifically, the TCJA’s new denial of alimony tax deductions applies to payments required by divorce or separation instruments; 1. Executed after December 31, 2018, or 2. Modified after that date, if modification specifically states that the new TCJA treatment of alimony payments now applies. When alimony payment are not deductible by the person paying then they are not taxable to the one receiving the payments.
Education Planning There are two ways to help your kids or grandkids with their education.
- Contributing to a 529 plan is one option, you can shelter from gift tax as much as $75,00 is a single year per beneficiary ($150,000 if your spouse joins in). If you contribute the maximum, you’ll be treated as gifting $15,000 (or $30,000) to that beneficiary in 2018 and in each of the next four years. Pay ins are excluded from your estate as long as you live through the fifth year. Planning note: now that 529 plans are not just for college, tax free distributions of up to $10,000 can now be taken each year to help pay for private parochial K-12 tuition. The $10,000 cap does not apply to 529 plan withdrawals to pay for college.
- Paying a person’s tuition directly to the school is tax-favored, too. The payment is not treated as a gift for purposes of the gift tax rules.
BUSINESS TAX ISSUES
Small business new rules For tax years after 2017, taxpayers other than C-corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2018, if taxable income does not exceeds $315,000 for a married couple filing jointly, $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health , actuarial science, consulting services, performing arts, athletics, financial services, investment management, trading services, dealing in securities, partnership interests, commodities, or any business where principal asset is the reputation or skill of one or of its employees), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased out for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.
PLANNING TIP: Tax payers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phase out of the deduction) for 2018. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.
Cash method of accounting More “Small Businesses” are able to use the cash method of accounting in 2018 and later years than were allowed to do so in the past. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. Effective for tax years beginning after December 31, 2017, the gross-receipts test is satisfied if, during a three year test period, average annual gross receipts don’t exceed $25 million (the dollar amount use to be $5 million). Cash method taxpayer may find it a lot easier to shift income, for example, by holding off billing till next year or by accelerating expenses, paying bills early or by making certain prepayments.
Bonus depreciation Finally a deduction for business that makes sense, businesses can claim a 100% bonus first-year depreciation for machinery and equipment – bought and place in service, new or used (with some exceptions) in 2018. That means 100% of the cost whether paid off or not placed in service this year is fully deductible. As a result, the 100% bonus first- year write off is available even if the qualifying asset is in service for only one day in 2018.
Expensing 179 Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2018, the expensing limit is $1,000,000 and investment ceiling limit is $2,500,000. Expensing is generally available for most depreciable property (other than buildings), and off- the- shelf computer software. Expensing is also available for qualified improvement property (generally, any interior improvement to a building’s interior, but not enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. Expensing deduction is available (provided you are otherwise eligible to take it) regardless of how long the property is held during the year. This can be a powerful planning tool, thus property placed in service even in the last day of 2018 gets the deduction if elected.
De minimis safe harbor election Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the cost of lower-cost assets and materials and supplies, assuming the cost does not have to be capitalized under Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election. The cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA,s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualified items before the end of 2018.
PLANNING TIP: The purpose of this election is to reduce the depreciation of small asset acquisitions use in your trade or business. This is another form of expensing, and there is no recapture of depreciation when the asset is disposed of later.
To accelerate or defer A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2018 (and substantial net income in 2019) may find it worthwhile to accelerate just enough of its 2019 income (or defer just enough of its 2018 deductions) to create a small amount of net income for 2018. This will permit the corporation to base its 2019 estimated tax installments on relatively small amount of income shown on its 2018 return, rather than having to pay estimated taxes based on 100% of its much larger 2019 taxable income.
Business owners can shift income and expenses between 2018 and 2019.
- Professionals can postpone their year-end billings to collect less revenue in 2018 or they can speed them up is they expect to be in a higher tax bracket next year.
- It may pay to postpone a bonus or to accelerate a bonus.
- Putting assets into service by December 31 can provide large write-offs: 100% bonus depreciation and Section 179, see above.
- Buying a new heavy SUV by December 31 can provide large write-offs. The SUV must have gross vehicle weight over 6,000 pounds.
- Purchasing a large pickup truck with gross vehicle weight over 6,000 pounds can be fully expensed or use 100% bonus depreciation as long as the cargo bed is at least six feet long and it is not accessible from the cab.
- Owners of regular corporations should consider taking a dividend as opposed to salary. If the corporation is in a lower tax bracket than the owner’s personal income tax bracket the owner gets a preferential tax advantage on the dividend and the corporation avoids payroll taxes. This only works with C-Corporations.
- Owners of companies should consider putting retirement plans into service before December 31. They may be funded in 2019 for 2018 if started by year-end
New C-Corporation rate Starting in 2018 the maximum corporate if 21% which allows a lot of tax planning, for small companies taking less salary and more dividend may be beneficial then in the past with the lowest rate being the 21% to the highest rate of 42% with the combination of the two taxes, both corporate and individual.
OTHER TAX ISSUES
Estate Tax The life time estate and gift tax exemption is $11,180,000 for 2018 or $23,360,000 for couples if portability is timely elected on form 706 after the death of the first-to-die spouse. Note this higher amount is set to expire after 2025 (most planners expect this law to become perinate, however, you never know what congress will do for certain). Planning here is very important, especially if the after 2015 the old laws come back excluding just over 5 million per person.
Who pays what of our income tax The IRS just released the 2016 “share of income and share of Federal Income Taxes Paid” report:
Top 1% income earners paid 37.3% of all income tax
Top 5% income earners paid 58.2%
Top 10% income earners paid 69.4%
Top 25% income earners paid 85.9%
Top 50% income earners paid 97%
Bottom 50% income earners only paid 3%
The above is Share of Total Adjusted Gross Income to Share of Total Income Taxes Paid. This is the actual “Internal Revenue Service Report”. Note to be in the top 1% you had to have adjusted gross income of $480,804 or more, to be in the bottom 50% you had to have adjusted gross income below $40,078. This group earned 11.6% of total AGI, yet only paid three percent of tax. In contrast to the top one percent earned 19.7% of AGI but paid 37.3% of taxes. Our income tax system is progressive, unlike sales tax and other taxes, that are a flat tax for everyone (same percentage for all), the more you make the higher percentage you pay. The question is always in our “progressive system”, “how much should someone that makes more than me be paying for the benefits”) that we all have? What is really fair? The percentage is relative, if the country needs more money to operate, than collect it from someone other than me is how many feel.
Social Security COLA Increase (see attached The Tax Book News ‘Social Security COLA Increase”). In 2019 social security benefits will increase by 2.8%.
This letter will be posted on the Web Site www.whalengroup.com , please share with friends, that’s the greatest compliment I can receive.
I wish all my clients, friends and family a Very Happy Thanksgiving. We have so much to be thankful for here in America yet it is also a time to remember the less fortunate, those suffering from storms, fires and other issues.
Al Whalen, EA, ATA, CFP®
Social Security COLA Increase (The Tax Book)
The Tax Cuts and Jobs Act of 2017
The Tax Book
Wolters Kluwer CCH CPELink
The Tax Foundation
Internal Revenue Service, Code and Regulations
IRS, Statistics of Income, Individual Income Rates and Tax Shares (2018)