Federal Tax Strategies for the End of 2018 and Beyond

2018 was a year of sweeping change. The enactment of the federal Tax Cuts & Jobs Act will dramatically affect many taxpayers, but time remains now to execute new strategies that will benefit you this tax year and in the future.

We examine a few actions you can still implement before the New Year to take advantage of the tax laws.

Convert Your Roth IRA

Many taxpayers feel that a Roth IRA offers several benefits over a traditional IRA. If you’re one of those people, and you meet the eligibility requirements, consider converting beaten-down stocks or mutual funds in a traditional IRA into a tax-advantaged Roth IRA. It’s not without consequences though; such a conversion will increase your Adjusted Gross Income (AGI) for the year of the conversion, whether 2018 or later, and could reduce some tax breaks geared to AGI.

Defer a Bonus

If you’re anticipating an employment-related bonus, approach your employer about deferring that payout until early 2019. Such a move could reduce and defer your tax for 2018 (or a future year in which a deferral takes place) into the following tax year.

Take IRA Required Minimum Distributions (RMDs)

Complying with tax rules and taking on-time RMDs from an IRA or a 401(k) or another employer-sponsored retirement plan can offer some advantages for the 2018 tax year. RMDs from IRAs must begin by April 1st of the year following the year you turn 70-1/2. That same start date applies to company-sponsored plans, except for non-5 percent company owners who continue to work; they can defer RMDs until April 1 in the year after they retire. Failure to take a required withdrawal is costly, resulting in a penalty of 50 percent of the RMD amount.

Say you reach age 70-1/2 in 2018. You could put off the first RMD until 2019, but if you do, you will have to take a double distribution in 2019 that totals the 2018 required amounts and the 2019 amount. Delaying 2018 distributions to 2019 could prove costly because bunching income into 2019 could place you in a higher tax bracket or reduce income tax deductions at higher income levels. You might take both distributions in 2019, however, if you will be in a substantially lower bracket next year.

Make Charitable Contributions from Your IRA

Taxpayers who are 70-1/2 or older by the end of 2018 should assess whether to make qualified charitable donations from their traditional IRAs by year’s end, especially if they cannot itemize deductions. These distributions are made directly to charities from your IRA account, so the contribution is not included in your gross income nor as a Schedule A deductible. The qualified charitable distribution also decreases your RMD, resulting in tax savings.

Boost the Amount You Set Aside for a Flexible Spending Account

Flexible spending accounts (FSA) are a means to invest pre-tax dollars to cover health care costs sometime in the future. Consider increasing the amount you set aside for next year in an employer’s FSA if the amount you contributed for 2018 was insufficient.

Know Your Medicare Surtax

When possible, higher-income earning taxpayers should steer clear of the 3.8 percent surtax on certain unearned income, calculated on the lesser of 1) net investment income or 2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in all other cases).

Your approach to minimizing or avoiding the 3.8 percent surtax this year will depend on your estimated MAGI and NII for 2019 or later years. Deferring additional NII could allow taxpayers to minimize exposure, while other taxpayers may want to reduce MAGI, or both NII and MAGI.

Prepare for the Medicare Tax

An additional 0.9 percent Medicare tax applies to taxpayers for whom the sum of their wages and self-employment income exceeds $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in all other cases. The law requires employers to withhold only the additional tax from wages above $200,000 regardless of filing status or other income. In instances where an employee earns more than $200,000 from two or more employers – and none of the employers compensate the person more than $200,000 individually, and therefore do not have to withhold – the taxpayer would be responsible for the additional Medicare tax outright. Self-employed taxpayers must consider the tax exposure when determining their estimated taxes.

Nail Down Stock Losses While Preserving Your Investment Position

Say you suffer a paper loss on a particular stock but want to stay invested in the company or industry. Under tax rules, you might be able to realize your losses on the shares for tax purposes and still retain the same, or approximately the same, investment position. You can accomplish this by selling the shares and buying other shares in the same company or another company in the same industry, or by liquidating the original holding then repurchasing the same stock at least one day later.

If you have questions about the actions you can take before December 31 to reduce your tax liability and plan for future tax years, please contact us to discuss your situation.