Taxes

End-of-the-Year Money Moves for 2018

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Here are some things you might want to do before saying goodbye to 2018.

What has changed for you in 2018?

Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2019 begins.

Even if your 2018 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.

Do you practice tax-loss harvesting?

That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust. (1)

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. When you live in a high-tax state, this is one way to defer tax. (1_

Do you want to itemize deductions?

You may just want to take the standard deduction for 2018, which has ballooned to $12,000 for single filers and $24,000 for joint filers because of the Tax Cuts & Jobs Act. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. While many miscellaneous deductions have disappeared, some key deductions are still around: the state and local tax (SALT) deduction, now capped at $10,000; the mortgage interest deduction; the deduction for charitable contributions, which now has a higher limit of 60% of adjusted gross income; and the medical expense deduction. (2,3)

Could you ramp up 401(k) or 403(b) contributions?

Contribution to these retirement plans lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so contributions to those accounts are not deductible and will not lower your taxable income for the year. They will, however, help to strengthen your retirement savings. (4)

Are you thinking of gifting?

How about donating to a qualified charity or non-profit organization before 2018 ends? In most cases, these gifts are partly tax deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.5

If you donate publicly traded shares you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2018, you may be able to claim a full or partial state income tax deduction (depending on the state).2,6

Of course, you can also reduce the value of your taxable estate with a gift or two. The federal gift tax exclusion is $15,000 for 2018. So, as an individual, you can gift up to $15,000 to as many people as you wish this year. A married couple can gift up to $30,000 in 2018 to as many people as they desire.7

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and workplace retirement plan? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.

Should you convert all or part of a traditional IRA into a Roth IRA?

You will be withdrawing money from that traditional IRA someday, and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are not taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. A Roth IRA conversion can no longer be recharacterized (reversed). (8)

Can you take advantage of the American Opportunity Tax Credit?

The AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.9

See that you have withheld the right amount. The Tax Cuts & Jobs Act lowered federal income tax rates and altered withholding tables. If you discover that you have withheld too little on your W-4 form so far in 2018, you may need to adjust your withholding before the year ends. The Government Accountability Office projects that 21% of taxpayers are withholding less than they should in 2018. Even an end-of-year adjustment has the potential to save you some tax.10

What can you do before ringing in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

Sources

  1. nerdwallet.com/blog/investing/just-how-valuable-is-daily-tax-loss-harvesting/
  2. marketwatch.com/story/how-to-game-the-new-standard-deduction-and-3-other-ways-to-cut-your-2018-tax-bill-2018-10-15
  3. hrblock.com/tax-center/irs/tax-reform/3-changes-itemized-deductions-tax-reform-bill/
  4. investopedia.com/articles/retirement/06/addroths.asp
  5. investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp
  6. savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth
  7. fool.com/retirement/2018/06/28/5-things-you-might-not-know-about-the-estate-tax.aspx
  8. marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26
  9. fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx
  10. money.usnews.com/money/personal-finance/taxes/articles/2018-10-16/should-you-adjust-your-income-tax-withholding

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

The Major 2018 Federal Tax Changes

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Comparing the old rules with the new.

The Tax Cuts and Jobs Act made dramatic changes to federal tax law.

It is worth reviewing some of these changes as 2019 approaches and households and businesses refine their income tax strategies.

Income tax brackets have changed.

The old 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets have been restructured to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These new percentages are slated to apply through 2025. Here are the thresholds for these brackets in 2018.(1,2)

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The standard deduction has nearly doubled.

This compensates for the disappearance of the personal exemption, and it may reduce a taxpayer’s incentive to itemize. The new standard deductions, per filing status:

  • Single filer: $12,000 (instead of $6,500)
  • Married couples filing separately: $12,000 (instead of $6,500)
  • Head of household: $18,000 (instead of $9,350)
  • Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

The additional standard deduction remains in place.

Single filers who are blind, disabled, or aged 65 or older can claim an additional standard deduction of $1,600 this year. Married joint filers are allowed to claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 for 2018. (2,3)

The state and local tax (SALT) deduction now has a $10,000 ceiling.

If you live in a state that levies no income tax, or a state with high income tax, this is not a good development. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or b) state and local income taxes or sales taxes per year. Taxes paid or accumulated as a result of business or trade activity are exempt from the $10,000 limit. Incidentally, the SALT deduction limit is just $5,000 for married taxpayers filing separately. (1,4)

The estate tax exemption is twice what it was.

Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%. (2)

More taxpayers may find themselves exempt from Alternative Minimum Tax (AMT).

The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

AMT exemption amounts have risen considerably in 2018:

  • Single filer or head of household: $70,300 (was $54,300 in 2017)
  • Married couples filing separately: $54,700 (was $42,250 in 2017)
  • Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers as opposed to respective, prior thresholds of $120,700 and $160,900. (2)

The Child Tax Credit is now $2,000.

This year, as much as $1,400 of it is refundable. Phase-out thresholds for the credit have risen substantially. They are now set at the following modified adjusted gross income (MAGI) levels:

  • Single filer or head of household: $200,000 (was $75,000 in 2017)
  • Married couples filing separately: $400,000 (was $110,000 in 2017) (2)

Some itemized deductions are history.

The list of disappeared deductions is long and includes the following tax breaks:

  • Home equity loan interest deduction
  • Moving expenses deduction
  • Casualty and theft losses deduction (for most taxpayers)
  • Unreimbursed employee expenses deduction
  • Subsidized employee parking and transit deduction
  • Tax preparation fees deduction
  • Investment fees and expenses deduction
  • IRA trustee fees (if paid separately)
  • Convenience fees for debit and credit card use for federal tax payments
  • Home office deduction
  • Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025. (5,6)

Many small businesses have the ability to deduct 20% of their earnings.

Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income*, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.) (4,7)

Not every pass-through business entity will qualify for this tax break in full, though.

Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business* may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers. Above these business income thresholds, the deduction for a business other than a specified service business* is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger. (4,7)

* See H.R. 1 – The Tax Cuts and Jobs Act, Part II—Deduction for Qualified Business Income of Pass-Thru Entities

We now have a 21% flat tax for corporations.

Last year, the corporate tax rate was marginally structured with a maximum rate of 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new 21% flat rate aligns U.S. corporate taxation with the corporate tax treatment in numerous other countries. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%. (2,4)

The Section 179 deduction and the bonus depreciation allowance have doubled.

Business owners who want to deduct the whole cost of an asset in its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company in 2018 can now write off 100% of qualified property costs through 2022 rather than through a longer period. Please note that bonus depreciation now applies for used equipment as well as new equipment. (1,7)

Like-kind exchanges are now restricted to real property.

Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property are permitted. (7)

This may be the final year for the individual health insurance requirement.

The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year. (1,8)

Sources

  1. cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions
  2. fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx
  3. cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html
  4. investopedia.com/taxes/how-gop-tax-bill-affects-you/
  5. tinyurl.com/ycqrqwy7/
  6. forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ 
  7. americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill
  8. irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

3 Mistakes That Leave You Vulnerable to Identity Theft & Tax Scams

Despite all the media attention, tax scams along with Identity theft continue to plague the american public, especially during tax time. In fact, according to MarketWatch  the IRS  has seen a “400% increase in phishing and malware this tax season” compared to last season. So, what mistakes are you making that could potentially cause you to fall victim?

Mistake #1: Emailing Sensitive Information

The one is a HUGE problem, and the one I am most passionate about. Since email is so ubiquitous and simple to use most of us don’t think twice about sending our personal information to our accountants, financial planners, bankers, attorneys, etc. The problem is that most email is not encrypted and therefore not secure. Even services like dropbox are questionable when it comes to sharing documents containing your social security number, account information, etc, particularly if you are not using two-step verification. Don’t get me wrong, having free email and using a file sharing service like dropbox is great, just don’t use email for sending any information someone could potentially use to access your accounts or credit cards, open accounts in your name, or file a return to claim your refund! Also, be sure to add the extra layer of protection with dropbox if you plan to use it. If you need to send sensitive documents or information regularly, you should upgrade from free email and document sharing to a more robust, secure and encrypted solution. However, if you only occasionally need to send this type of information electronically, the person requesting the information should have their own solution in place for you to collaborate with them. For example, at Weiss Financial Group we use the Secure Client Website by eMoney and our affiliate company Weiss, Orro, & Stern uses SmartVault. Make use of these tools, because the more precautions you take the less chance you have of becoming the next victim of ID theft or fraud.

Mistake #2: Responding to a Phone Call From the IRS Saying You Owe Them Money

First off, the IRS will NEVER call your house if you aren’t already working with an agent. So, if you come home and you have a threatening message on your answering machine (do people still have those?) DO NOT call them back. If by some lapse of judgement you do call them back, DO NOT give them your Social Security number or other personal info, and NEVER give them money. It is a scam! Surprisingly, this scam keeps popping up every year, and every year people fall for it. My wife and I actually came home to one of these messages on our answering machine last year (ok, I admit, I still have an answering machine!). Obviously we did not call them back, however the message sounded authentic and was quite threatening. Want to hear a sample of one of these phony messages? Click here to watch a video I found on YouTube of an actual message left on someone’s cell phone. To see what the IRS says about all this, click here for a short video from the IRS regarding these scams along with some helpful scam prevention advice.

Mistake #3: Clicking on an email from the IRS or a Bank Requesting Personal Information

Clicking on emails from unknown sources exposes you to all sorts of bad things including a potential computer virus. So, as tempting as it is, train yourself not to open them! As I said before, the IRS will not call you at home, likewise they will not email you asking for sensitive information. Unfortunately, emails are quite easy to forge and fool you into thinking they are authentic. Just remember that the IRS will not send you a threatening email, so if you receive one don’t open it, and definitely do not hit reply.

I hope this gives you the ammo you need to protect yourself from making any of these mistakes. Be alert and be smart. If you have any questions, do not hesitate to reach out.


Source:

  1. This material was prepared, in part, by MarketingPro, Inc.