The end of the year is coming soon, which means it’s time to make any changes that might affect your 2018 taxes. The material below has been prepared for informational purposes only. All decisions regarding tax implications should be made in consultation with your independent tax advisor.
Maximize/Bunch Itemized Deductions
The standard deduction has increased to $12,000 for individuals/$24,000 for joint filers. Therefore, it may be advantageous to incur several years of charitable contributions, so that combined with other permitted itemized deductions, taxpayers may exceed the standard deduction.
Direct Qualified Charitable Contributions from Traditional IRAs
Individuals age 70½ and older may direct up to $100,000 from a traditional IRA be distributed directly to qualified charitable organizations. Those amounts are then not taxable income to the individual and may satisfy the required minimum distribution. The contribution must be made directly from the IRA Custodian to the qualified charity. Contact Heartland Trust Company or your IRA trustee or custodian for further details.
Consider Investing in Tax Exempt Municipal Bonds or Bond Funds
Interest on state or local municipal bonds is generally exempt from federal income tax and often from state income tax. Interest paid on municipal bonds is a bit less than the corporate bond interest rate, but for individuals in upper income tax brackets, the after tax return may be higher.
Contribute to a Retirement Plan
Maximize contributions to an IRA or employer’s retirement plan such as a 401(k). Determining whether to make tax deferred or Roth (non-deductible) contributions will depend on your personal tax situation, so consult your tax advisor and trust officer for guidance. Clients who expect to be in a higher tax bracket in retirement may also find it advantageous to convert their traditional IRA to a Roth. While this will incur tax in the year of the conversion, it allows withdrawals in retirement to be tax free.
Accelerate or Defer Income to Year with Lower Tax Bracket
Some year-end bonuses, sales of capital gain property, distributions from retirement accounts (other than required minimum distributions), and other discretionary income can be strategically taken in a year with a lower tax rate.
Claim Child Tax and Education Credits
Child tax and education credits may be reduced at various income levels. Education credits, however, may possibly be transferred to the student, who is likely in a lower tax bracket and may be able to take advantage of the tax credit.
Take Advantage of Education Savings Plans
Although there is generally no tax deduction for education savings plans, earnings grow tax free (if used for a qualified education expense). There are a number of plans for K-12 and college education, as well as education-related expenses. Many states offer income tax incentives for state residents, such as a tax deduction for contributions.
Watch for Alternative Minimum Tax (AMT) Triggers
The Tax Cuts and Jobs Act signed in December 2017 brought significant changes to the Internal Revenue Code, including the number of individuals subject to the Alternative Minimum Tax (AMT):
- Higher exemption levels – The amount of income automatically exempt from the AMT calculation has been increased to:
- $109,400 for joint filers
- $70,300 for individual filers
- Higher exemption phaseout levels – The level of income above which you gradually lose your income exemption, until it disappears completely has been increased to:
- $1 million for joint filers
- $500,000 for individuals
- Fewer tax breaks under the regular tax code – AMT has traditionally been triggered when filers claim exemptions, credits and deductions that are not allowed under AMT. Since numerous breaks have been eliminated in the new tax laws, fewer filers will be eligible for the deduction triggers, and thus not subject to AMT.
Estimates from The Tax Policy Center indicate that only approximately 200,000 tax filers are expected to be required to file AMT in 2018, versus 5.25 million filers who would have been required to file AMT under the old tax laws.