Here is some helpful information for end of year tax planning.
FOR 2018 YEAR-END
Standard Deduction versus Itemizing Deductions.
The TCJA almost doubled the standard deduction amounts. This means that many taxpayers will be taking the standard deduction versus itemizing their deductions. As a result of claiming the standard deduction, many expenses previously used as tax deductions, such as mortgage interest, property and sales taxes, and charitable donations, will not benefit you from a tax perspective. Whether a Taxpayer should accelerate itemized deductions, to try and exceed the standard deduction, depends on the Taxpayer’s particular situation
Manage Your Adjusted Gross Income (AGI).
Many tax breaks for 2018 are only available to taxpayers with AGI below certain levels. Some of these tax breaks include the child tax credit, writing off rental real estate losses, the exclusion of social security benefits, and qualifying for education credits. Some ideas for managing your adjusted gross income include making a contribution to an IRA, making a contribution to an HSA, selling securities at a loss, and accelerating business expenses.
Harvest Capital Losses.
Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can be a tax-smart idea. The resulting capital losses will offset capital gains from other sales this year. If capital losses for this year exceed capital gains, you can use the net capital loss to shelter up to $3,000 of this year’s ordinary income. Any excess net capital loss is carried forward to next year.
Make charitable Gifts of Appreciated Stock.
If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares.
Consider a Health Savings Account (HSA).
If you are enrolled in a high-deductible health plan, you may be eligible to make pre-tax contributions to an HSA. Distributions from the HSA will be tax free as long as the funds are used to pay unreimbursed qualified medical expenses.
Ideas for Your Business
Maximize the New Deduction for Pass-through Business Income.
This new deduction, based on Qualified Business Income (QBI) from pass-through entities, was a key element of the TCJA. For tax years beginning in 2018, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.
For QBI deduction purposes, pass-through entities are defined as sole proprietorships, LLC’s that are treated as sole proprietorships or partnerships, partnerships, and S corporations. Because of the various limitations on the QBI deduction, individuals who are owners of a pass-through entity have some unique tax planning opportunities.
Consider Paying a Dividend in 2018.
If you are an employee of your own Corporation you may want to take a year-end dividend in lieu of a payroll bonus. There are many rules about when it is beneficial to do this and under what circumstances the IRS allows you to do this. Also, the rules are very different depending on whether you are a C or an S Corporation.
Use your Section 179 Deduction.
For 2018, businesses can deduct up to $1 million of equipment, furniture, and other tangible property (with certain limitations – of course). It can be claimed for property placed in service anytime during the tax year, including the last day. Furthermore, some types of real property improvements may qualify, including improvements made to interiors of qualified retail and leased nonresidential buildings. Roofs, alarm systems, and security systems installed in non-residential buildings are now eligible for the Section 179 deduction.
First year Bonus Depreciation.
Above and beyond the Section 179 deduction, your business can claim first-year bonus depreciation equal to 100% of the cost of new and used equipment and software placed in service by December 31st of this year.
Consider your Partnership and S Corporation Stock Basis.
If you own an interest in a partnership or S corporation that you expect to generate a loss in this year, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end to ensure you have sufficient basis to claim a full deduction.
Some types of retirement plans need to be established prior to December 31st. Others can be established and funded as late as the extended due date of your tax return.
If you are an employee of your own Corporation or Limited Liability Company, remember to reimburse yourself for business expenses that you have paid personally, by December 31st. This includes the reimbursement for your home office and business miles that you have placed on your personal vehicle. The mileage rate for 2018 is 54.5 cents per mile.
Should you change your business structure for 2019, or elect to treat your LLC as if it were a Corporation? The best time to make such a change is January 1st.