The Tax Cuts and Jobs Act (TCJA) included many provisions that will affect individuals for tax years after December 31, 2017. These changes include a temporary reduction in the highest marginal tax rate, a roughly doubled standard deduction and significant changes to itemized deductions, which are set to expire December 31, 2025, absent further legislative action. For more information on these changes and other TCJA-related changes, visit BKD’s Tax Reform Resource Center.
With year-end approaching, here are five steps to guide your year-end tax planning strategies before December 31, 2018.
Step 1: Review Your Current Tax Situation
The effect of tax law changes will vary greatly depending on your personal tax situation. To properly evaluate what these changes mean for you, you’ll need to know a few things based on your most recent tax return. Review your 2017 Form 1040, U.S. Individual Income Tax Return, and 2017 Schedule A (Form 1040), Itemized Deductions, and take note of the following amounts:
- Filing status (line 1): Your filing status, i.e., single, married filing jointly (MFJ), etc., determines a number of items on your tax return, including your tax bracket, limitations on deductions and the phaseout of items like the alternative minimum tax (AMT).
- Adjusted gross income (line 37): Various tax law limitations are typically based on a percentage of this number.
- Itemized (or standard) deduction (line 40): Fewer individual taxpayers will itemize deductions due to the increased standard deduction and modifications to several popular itemized deductions. Read our article “2018 Individual Tax Year in Review” for more on these changes.
- Exemptions (line 42): Personal exemptions are eliminated for the 2018–2025 tax years.
- Taxable income (line 43): Your marginal tax rate under the individual income tax brackets is based on your filing status.
- AMT (line 45): The TCJA increased the AMT exemption amount and its phaseout for 2018–2025 tax years. This could reduce or, in many cases, eliminate your AMT tax.
Step 2: Consider Any Changes to Your Tax Situation
Did you change jobs in 2018? Do you expect to start a business in 2019? Once you’ve reviewed your 2017 tax return, consider how your tax situation may have changed in 2018 and how you expect it to change in 2019. These factors will be important for evaluating the potential effect(s) of the new tax bill.
Step 3: Assess the Timing of Business Income & Deductions
One of the TCJA’s most significant provisions for noncorporate taxpayers with business income from partnerships, S corporations, trusts, estates and sole proprietorships is the Internal Revenue Code (IRC) Section 199A qualified business income (QBI) deduction for 2018–2025 tax years. See this flowchart for a closer look at this deduction and to analyze your eligibility for this deduction. Limitations and, in some cases, elimination of the deduction kick in once your 2018 taxable income exceeds income thresholds of $315,000 for MFJ and $157,500 for all others. Such limitations are based on a percentage of W-2 wages paid with respect to the business, unadjusted basis immediately after acquisition (UBIA) of qualified property and the type of trade or business you’re engaged in, i.e., a specified service trade or business. Read our whitepaper to learn more about this deduction.
Taxable Income Limitation Planning Strategies
If your taxable income is near the threshold, you may consider the following income-reducing strategies to help avoid limitations to the deduction. With that said, it’s important to carefully analyze all facts and circumstances over multiple years before implementing any of these strategies.
- Place qualifying assets in service before December 31, 2018, to take advantage of accelerated cost recovery provisions in the TCJA, including 100 percent bonus depreciation and an enhanced §179 deduction. Read our article for more information on these provisions.
- Evaluate possible changes to your business’s methods of accounting for income and deductions to see if there’s an opportunity to accelerate deductions or defer income.
- Consider increasing contributions to defined benefit and defined contribution retirement plans, including simplified employee pension plans, Savings Incentive Match Plans for Employees and 401(k)s.
After the TCJA, it also will be important to carefully manage taxable losses due to changes in the limitations on net operating losses (NOL). These changes will limit the NOL deduction to 80 percent of taxable income for NOLs arising in taxable years beginning after December 31, 2017. There also is a new excess loss limitation that limits the deduction of trade or business losses for noncorporate taxpayers to $500,000 for MFJ and $250,000 for all other taxpayers. Check out our article “NOL Rules & Excess Business Loss Limitations Under TCJA” for more details.
W-2 Wages & UBIA of Qualifying Property Limitations
If your taxable income exceeds the threshold amount, your QBI deduction may be limited to a percentage of W-2 wages or both W-2 wages and the UBIA of qualifying property. A strategy to help manage these limitations could include an aggregation of multiple trades or businesses qualifying for the deduction as provided under recently released proposed regulations. Read our BKD Thoughtware® article and consult your trusted BKD advisor for more information.
Step 4: Evaluate the Timing of Nonbusiness Income & Deductions
Common tax year-end tax planning strategies include deferring income and accelerating expenses. Review the below opportunities and consider if they apply to your tax situation.
- Employees: Consider delaying payment of discretionary bonuses and lump sum payments not subject to the rules governing deferred compensation plans until after December 31, 2018. Also consider waiting to exercise stock options on vested nonqualified stock options until 2019.
- Age 70½: Wait to take your first-year required minimum distributions (RMD) or elective distributions from an individual retirement account (IRA) until after December 31, 2018. Also consider making a qualified charitable distribution of up to $100,000 from your IRA, as this counts toward your RMD and you don’t have to itemize your deductions to gain the benefit of the charitable contribution.
- Charitable contributions: With the increased standard deduction, it may be beneficial to bundle your charitable contributions into alternating years. Consider contributing to a donor-advised fund, which would allow you to receive an immediate tax deduction and designate the amount and recipient of fund distributions in future years. Watch this archived webinar for more on how the TCJA affected charitable giving strategies.
Step 5: Evaluate the Effects of Other Tax Law Changes
Consider the effects of other tax law changes on your 2018 tax return, including the below provisions effective for 2018–2025 tax years.
- Tax rates and brackets: Review this chart for a comparison of 2017 and 2018 tax rates and brackets.
- Child tax credit: The TCJA increased this credit from $1,000 to $2,000, with the phaseout beginning at $400,000 MFJ ($200,000 for single) instead of $110,000 MFJ ($75,000 single).
- Family tax credit: For dependents other than qualifying children, the new law added a $500 credit with a phaseout at $400,000 MFJ ($200,000 single).
- Estate and gift tax: The TCJA also temporarily doubled the lifetime exemption amount to an inflation-adjusted $11.18 million per person for 2018. Read our article “Year-End Estate & Gift Planning After Tax Reform” for more on these changes as well as the related planning considerations.
- Choice of entity: Taken together, the TCJA’s provisions also significantly change the factors to consider for choice of entity. This change has prompted many to re-evaluate the form in which they do business. Review this checklist with your trusted advisor to help you evaluate the need for possible change.
Contact Kori or your trusted BKD advisor to learn more about how possible tax changes may affect your situation before year-end.