At this point, every U.S. taxpayer is aware of President Trump’s tax reform. Called the Tax Cuts and Jobs Act (TCJA), this bill lowered tax brackets and raised standard deductions across the board.

While tax reform was designed to lower taxes, some taxpayers will end up paying more. This is especially true in states like California. With property and state income taxes now only deductible up to $10,000, many Californians will lose a significant tax break.

As you prepare for the New Year, consider the following tax strategies. Before implementing these or any other ideas, however, you must understand how the tax reform bill will impact your and your family’s unique situation.

High Income

Bunching charitable deductions

More taxpayers will use the standard deduction than before. This is because the standard deduction was doubled and many itemized deductions repealed or capped.[1] As a result, your usual charitable gifts may offer little to no tax benefit. Taxpayers in this situation may wish to bunch deductions by donating a few years’ worth of gifts at once into a Donor Advised Fund. This effectively “front loads” your giving. You receive the full deduction for 2018 but don’t name the final charitable beneficiary until later. If you give an investment with a large gain, you can receive the double tax benefits of a charitable deduction as well as escaping capital gain taxes.

Medical expenses

In 2018, all taxpayers can deduct medical expenses over 7.5% of their AGI. Next year, however, this threshold will revert back to 10% of AGI.[2] If you’re close to this limit, consider receiving elective medical treatment before end of year.

Opportunity zone fund

Did you sell an asset with a significant gain this year? Consider investing the proceeds into a Qualified Opportunity Fund (QOF). A QOF is designed to invest in property located in economically-distressed communities. Any prior gains are deferred until December 31, 2026 or when the investment is sold, whichever comes first. Additional tax benefits are available after 5, 7, and 10 years.[3]

Low Income/Large Losses

Roth IRA conversion

Did you have unusually low income or a large capital loss this year? Combine that with lower tax brackets from the TCJA, and 2018 may be the perfect year to convert a Traditional IRA into a Roth IRA. While you pay ordinary income taxes now, withdrawals are tax free in retirement.

Tax-gain harvesting

You might have heard of tax-loss harvesting, or selling positions with a loss to shrink your tax bill. Individuals with low income or large loss may consider the opposite strategy: tax-gain harvesting. This locks in gains in a year with lower tax brackets.

Exercising ISOs and NQ stock options

2018 may be an ideal time to exercise stock options. With limitations on AMT (alternative minimum tax) preference items like the property and state income tax deduction, fewer taxpayers will be subject to AMT in 2018. This is great news for the holders of ISOs (incentive stock options), which generate AMT income when exercised. If you hold non-qualified stock options, you may still be in luck. The difference between the market price and grant price is taxed as ordinary income when you exercise your options. With lower tax brackets from the TCJA, however, Uncle Sam may claim a smaller slice of your gains.

Business Owners

Corporate structure

Calling all business owners – it’s time to give your business structure a second look. The TCJA reduced the top rate for C corporations from 35% to 21%. To compensate non-corporate businesses, section 199A was enacted to allow a deduction of up to 20% of pass-through income. This includes income from a sole proprietorship, partnership, or S corporation. Section 199A, however, is complex and subject to numerous limitations, including type of business and taxpayer’s income.[4] Talk with your tax and legal counsel before considering any changes to your business structure.

Deductions

While revisiting your business structure, don’t forget to check your deductions. The TCJA expanded section 179, an election allowing small to mid-sized companies to deduct business property in the year of purchase instead of depreciating the cost over time. The TCJA doubled the limit from $500,000 to $1,000,000 for 2018, with the phase-out starting at $2,500,000 instead of $2,000,000. There was also a temporary increase in bonus depreciation. The depreciation percentage jumped from 50% to 100% for qualifying property acquired and placed in use between September 28, 2017 and December 31, 2022.[5]

Gifting and Estate Planning

Lifetime giving

Changes under the TCJA may require that you rethink your previous giving strategies. The gift and estate tax exemption has risen to $11,180,000 ($22,360,000 for married couples). This will sunset in 2026 and revert back to the previous limit.[6] Moreover, the low interest rates in recent years, while frustrating with low savings and bank CD rates, have helped the estate planning world. Certain strategies rely on investment returns growing faster than the rates required by the IRS, easier to achieve with lower interest rates.[7]  These rates, however, are on the rise. Speak with your estate planning attorney to determine the best strategies for you and your family.

Kiddie taxes

The TCJA significantly changed the taxation of gifts to children, grandchildren, and other young loved ones. The kiddie tax applies to net unearned income above $2,100 for children under age 18 or full-time students up through age 23. While this income used to be taxed at the parent’s highest marginal tax bracket, it is now taxed separately at the rates for trusts and estates.[8] Depending on your family’s situation, this could mean more or less taxes owed on gifts to minors.

529 plans

You might have heard that the TCJA expanded the use of 529 plans. While these accounts were originally intended for higher education, up to $10,000 per year can now be used for elementary school education without a federal tax penalty. Be warned, however. While there is no federal penalty, some states (such as California[9]) will still impose a penalty.

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[1] https://www.accountingtoday.com/list/10-year-end-tax-planning-tips-for-2018-after-tax-reform?utm_campaign=tax%20practice-dec%204%202018&utm_medium=email&utm_source=newsletter&eid=67c547ef9d7c3f767593548829977cba

[2] https://www.thebalance.com/medical-expenses-3193003

[3] https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

[4] https://www.thetaxadviser.com/issues/2018/apr/understanding-sec-199A-business-income-deduction.html

[5] https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act

[6] https://www.accountingtoday.com/opinion/the-down-and-dirty-on-the-new-tax-rules-and-estate-planning

[7] https://www.accountingtoday.com/list/10-year-end-tax-planning-tips-for-2018-after-tax-reform?utm_campaign=tax%20practice-dec%204%202018&utm_medium=email&utm_source=newsletter&eid=67c547ef9d7c3f767593548829977cba

[8] https://www.marketwatch.com/story/the-kiddie-tax-is-getting-easier-and-maybe-cheaper-under-the-new-tax-law-2018-05-24

[9] https://www.kiplinger.com/article/investing/T002-C000-S002-using-a-529-plan-to-pay-for-private-school.html

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