Year-End Tax Planning Considerations

by Fraser Trebilcock
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For many people, the end of the year tends to sneak up on us in a whirlwind of winter weather activity, family gatherings, and holiday festivities. However, even as 2018 draws to a close, it’s not too late to think about your year-end taxes, and engage in estate & income tax planning opportunities. At Fraser Trebilcock, our tax attorneys have made sure you don’t have to start your preparations from scratch, with a two-part checklist of year-end tax considerations you should make before 2019.

Estate and Gift Tax Planning

The Tax Cuts and Jobs Act of 2017 doubled the previous federal estate tax exemption of $5,000,000 to $10,000,000 per individual ($20,000,000 combined for married persons). As this number has been adjusted for inflation for subsequent years, many people have shifted their focus to income tax planning. The federal estate tax exemption for 2018 is $11,200,000 (or $22,400,000 combined for married persons) and $11,400,000 for 2019 ($22,800,000).

Currently, the lifetime gift tax exemption amount tracks the federal estate tax exemption for decedents of $11,200,000 (and $11,400,000 for 2019).

If you’re thinking about beginning an annual gifting program, or want to continue a program you’ve already started, there are some things you should know. From an estate and gift tax planning perspective, the most commonly used method for tax-free giving is the annual gift tax exclusion. This method allows you to give up to $15,000 (for 2018 and remaining at the $15,000 level for 2019) to each donee, without reducing your estate and lifetime gift tax exclusion amount. It’s also important to note that there is no limit to the number of people to whom you may make such gifts, and that the annual gift tax exclusion is applied on a per-donee basis ($15,000 per individual donee).

Additionally, you and your spouse could choose to combine your exemptions into a single gift from either of you. By sharing in the gift of one spouse, married donors may double the amount of the exclusion to $30,000. This method of transfer could help you 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.” Have children in college? Qualifying tuition payments may also be made or continued, in addition to medical payments. These amounts do not count against the $15,000 annual exclusion limit.

Another thing to remember is that if you’re required to submit a written valuation in connection with your annual gifting program, you might be able to utilize a single valuation, for gifts made in December of 2018 and January of 2019.

As interest rates remain relatively low, there are still great opportunities to make asset transfers in order to shift appreciation out of your estate, for estate planning purposes. Because the current environment is so favorable to current interest rates, this is a great time to consider more sophisticated estate planning strategies such as grantor retained annuity trusts, sales to intentionally defective grantor trusts, charitable trust planning, loans to family members, and other planning techniques, especially if you are potentially subject to estate tax. These more advanced planning techniques are only successful when the investment performance achieved exceeds certain interest rate assumptions embedded in the Internal Revenue Code, which your tax attorney can help you navigate.

Income Tax Planning

Since we know that everyone would love to potentially reduce their overall tax liability for 2018, it’s important to consider various income tax planning techniques before years’ end. When evaluating appropriate planning techniques, you should review the overall impact of any such planning for the two year period of 2018 and 2019.

Traditional income tax planning options include the postponement of income until 2019, as well as accelerating deductions into 2018. This strategy might allow you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). If there’s a chance you might be in a lower tax bracket next year, it may be advantageous to try to arrange with your employer to defer a bonus that you may be entitled to until 2019.

With regard to accelerating deductions, consider using a credit card to pay deductible expenses before the end of the year, including charitable contributions. This can increase your 2018 deductions, even if you don’t pay your credit card until after the end of the year. If you expect to owe state and local income taxes when filing your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before the end of the year, so that you might deduct those taxes for 2018. The Tax Cuts and Jobs Act of 2017 made significant changes to individual income taxes, including the following:

  • Increased the standard deduction for individuals to $12,000 and $24,000 for married couples filing jointly.
  • The deduction for state and local income tax, sales tax and property taxes (“SALT deduction”) will be capped at $10,000. This has more impact on taxpayers with more expensive property, generally those who love in higher-income areas, or people in states with higher rates for state tax. NOTE: The change in the SALT deduction may affect the traditional benefits of accelerating deductions as discussed above.
  • The benefits associated with charitable contrubutions and the related charitable deduction for income tax purposes could be impacted by the increased standard deduction. Individuals whose itemized deductions as limited by the Tac Cuts and Jobs Act of 2017 may wish to apply a bunching strategy to maximize any potential charitable deductions in a given tax year.

Other common elements of income tax planning may also include selling capital assets (such as stock investments) for the purpose of generating a capital loss to offset any capital gains that you have already realized for the year. When considering year-end tax planning moves, it is also important to take into account the potential impact of such planning on the alternative minimum tax for 2018, so be sure to consult with your tax attorney.

If you’re on the higher end of income earners, be wary of the additional 0.9% Medicare tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

Retirement Planning for 2018

It’s never the wrong time to put a little extra focus on your retirement planning, especially towards the end of the year as tax-saving opportunities continue. As a taxpayer, you still have the ability to convert funds in a traditional IRA (including SEP’s and SIMPLE IRAs), §401(a) qualified retirement plans, §403(b) tax-sheltered annuities or §457 government plans into a Roth IRA. You also might want to consider converting money which is currently invested in depressed stocks (or mutual funds) into a Roth IRA if you are eligible to do so.

The Tax Cuts and Jobs Act repealed the special rule permitting recharacterization of Roth conversions for tax years beginning after December 31, 2017. Therefore, for example, a conversion contribution establishing a Roth IRA during a tax year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion).

These are just a few of the year-end tax planning considerations that you can make before the calendar turns to 2019, so stay tuned for part 2 of this blog for more tax planning opportunities. And don’t forget that your taxpayer circumstances are unique, so not all of these suggestions will benefit everyone.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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