10 year-end tax-planning tips after tax reform

December 3, 2018 2:10 PM

Last December’s tax-reform bill upends conventional tax-planning strategies and dramatically changes the landscape for this year’s tax filings. Here are 10 of the most important 2018 year-end tax-planning considerations for individual clients from Grant Thornton.

Double-check your withholding and estimated taxes.

W3 form, pen and a glass against a white background

Arvind Balaraman/Arvind Balaraman - stock.adobe.c

The individual tax changes cut both ways. Your clients may be familiar with the major deductions they’re losing, but less familiar with the impact of some of the more favorable changes like the expanded tax brackets. It’s not easy or intuitive to figure out what it all means to your clients' bottom line. There’s no substitute for actually running the numbers. If your clients are in danger of being penalized for underpaying tax throughout the year, they can make up the shortfall through increased withholding on their salary or bonus. Bumping up their last quarterly estimated tax payment can still expose them to penalties for underpayments in previous quarters. But withholding is considered to have been paid ratably throughout the year, so a big jump in withholding on high year-end wages can save them in penalties.

Clients should understand whether to take the standard deduction.

Picasa/jfergusonphotos - stock.adobe.co

Millions of taxpayers who routinely itemized deductions in past years are expected to take the standard deduction in 2018. That’s because the standard deduction is doubled, while dozens of itemized deduction are repealed and the state and local tax deduction is capped at $10,000. It’s critical for clients to know whether they should expect to take the standard deduction before making decisions on year-end spending on things that generate itemized deductions. Taxpayers generally would not get any additional deduction for things like charitable gifts or elective health care procedures if they do not itemize deductions.

Get your clients' charitable house in order.

Series for United States Tax season, with 1040 forms, etc.

Sean Locke/seanlockephotography - stock.ado

If your clients will be itemizing deductions and plan on giving to charity before the end of the year, they should remember that a cash contribution must be documented to be deductible. If they claim a charitable deduction of more than $500 in donated property, they must attach Form 8283. If they are claiming a deduction of $250 or more for a car donation, they will need a contemporaneous written acknowledgment from the charity that includes a description of the car. They cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

Clients should be careful with their mortgage deduction.

House with money and tax paper – us schedule A form

Karen Roach/Karen Roach - Fotolia

Tax reform lowered the amount of debt taxpayers can use to claim a mortgage interest deduction from $1.1 million to $750,000. But there are grandfathering rules for some pre-existing mortgages. If clients have a mortgage between $750,000 and $1.1 million, they should be aware of the rules before modifying a mortgage to make sure they don’t lose a valuable deduction.

Leverage retirement account tax savings.

Picasa/maxexphoto - stock.adobe.com

Retirement incentives for traditional retirement accounts like a 401(k) or individual retirement account still offer some of the most valuable tax benefits. It’s not too late for taxpayers to increase their contributions. Contributions reduce taxable income at the time they are made, and clients don’t pay taxes until they take the money out at retirement. The 2018 contribution limits are $18,500 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).

Defer capital gains by investing in an opportunity zone fund.

Isolated green road sign on a white background

JeremyWhat - Fotolia

Tax reform created one of the most generous tax incentives ever to encourage investment in areas in need of development. If your clients are thinking of selling assets that would generate large capital gains this year, they can defer the gain if they invest an equal amount in an opportunity zone fund within six months of the sale. They won’t recognize the gain until the investment is sold, or by Dec. 31, 2026, at the latest. They can get up to 15 percent of the deferred gain forgiven entirely for holding the investment for specified time periods, and if they hold the investment 10 years, they will pay no tax on any additional gain. There are more than 8,000 opportunity zones throughout the United States and numerous funds are expected to be open to investors.

Remember state and local tax obligations.

Long shadow map of United States of America and its flag with the text TAX

State and local governments impose their own filing and payment responsibilities with various income, sales and property taxes. The changes to federal tax rules make filing state taxes even more difficult. Be sure to check the states where your clients pay taxes to understand if the states are following the biggest changes to federal rules.

Consider large purchases before state taxes on internet purchases are effective.

Person holding a credit card and shopping on a computer.

The U.S. Supreme Court’s South Dakota v. Wayfair ruling this year erased a restriction on when states can require internet sellers to collect state sales tax. The rules were always complex, but under the previous Supreme Court standard, businesses generally could not be forced to collect taxes on online sales in states where they had no physical business presence. The Supreme Court struck down this standard, and dozens of states are enacting laws requiring businesses to collect tax on internet sales even when the business has no physical presence in the state.

If your clients live in a state with a new law that isn’t effective yet, they should consider making big holiday purchases before the new rules go in force. But they should be careful, because the laws in each state are different and whether tax is imposed now or in the future may depend on who the seller is. Taxpayers should only accelerate purchases that would be free from sales tax now, but won’t be in the future. (It should also be noted that most states also impose use taxes.)

Don’t squander the gift tax exclusion.

Taxpayers can give up to $15,000 to as many people as they wish in 2018, free of gift or estate tax, and get a new annual gift tax exclusion every year, so they shouldn't let it go to waste. Taxpayers and their spouses can use their exemptions together to give up to 30,000 per beneficiary. If they have four children and 10 grandchildren, for example, they can remove $420,000 from their estate tax-free this year.

Leverage low interest rates and generous exemptions before they’re gone.

The historically low interest rates and lifetime gift and estate tax exemption presents an even better estate planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. With the economy growing and unemployment down, the Federal Reserve has been raising rates. There’s a small window of opportunity to employ estate-planning techniques while interest rates are still low and the lifetime gift exemption is at an all-time high. Tax reform doubled the gift and estate tax exemptions, but like the rest of the individual provisions, this change is set to expire in a few years.