Year-End Tax Review & 2019 ChangesSubmitted by Alsworth Capital Management, LLC on December 6th, 2018
I hope that you are enjoying the Holiday season. As we approach the end of 2018, we wanted to give you a few updates regarding tax law changes and strategies.
Itemized vs. Standard
One of the biggest changes to the tax laws this year was to eliminate the Personal Exemption Deduction entirely ($4,050 per person). The Standard Deduction amount was then raised to $12,000 for single filers and $24,000 for married filers to help offset this change. Many people that were previously eligible to deduct expenses such as healthcare costs, mortgage interest, real estate taxes, state income tax, charitable contributions and many other miscellaneous deductions will no longer have enough in total deductions to exceed the new Standard Deduction amount. To push more filers to the Standard Deduction, the entire Miscellaneous Itemized Deductions category was eliminated and the state income tax as well as real estate tax deduction was lumped together as one category and limited to no more than $10,000.
For some folks, this means simplifying your returns, since you wouldn’t need to keep track of the normal itemized deduction items. However, the limitations to itemized deductions disproportionately harmed tax payers in states that pay high income tax and real estate taxes, such as New York, California, Connecticut, Maryland and New Jersey. Some of the states have passed legislation to “decouple” their tax laws from the federal laws for itemized deductions. New York has recently passed this legislation and others are considering it. This means that some tax payers will end up filing Standard Deduction on their federal tax return, yet continue to use Itemized Deductions for their state tax return. To be safe, please continue to include your tax documents and supporting worksheets for itemized deduction items, even if you believe that you will not be eligible for the federal deduction.
There are a couple tax planning strategies to consider that we can discuss, if they are applicable. If you are close to being able to itemize deductions and you give regularly to charities, you might consider postponing contributions that you would normally make in December and instead contribute in January of next year. This would book those contributions in 2019. You could then make your normal year end contributions for 2019 in December of next year. This “doubling up” of your charitable contributions may push you over the standard deduction limit and allow you to deduct contributions that would otherwise not be credited. Another strategy that we have been employing with some clients is to setup a Donor Advised Fund. This is a special account, in your name, that we can manage for you that is under the oversight of a non-profit foundation. You can make a large charitable contribution to this fund in a single tax year and claim the deduction. You are then free to distribute the funds to the charity of your choice over as many years as you would like. As an example, you could make a large contribution in 2018, then distribute to your charities over the next five years. I would only consider this strategy for contributions of $50,000 or more. You can also contribute appreciated investments to avoid capital gains taxes, as an added tax savings. If you would like to learn more about Donor Advised Funds, please let us know.
Qualified Charitable Distributions (over 70 ½ years old)
If you are over age 70 ½ and need to take Required Minimum Distributions (RMD) from your IRA accounts, you can make a special distribution from the IRA directly to the charity of your choice. The distribution, if done with the proper forms, will allow you to avoid paying income tax on the distribution out of your IRA account and it will also count toward the RMD amount that must be distributed. Please let us know if you have any questions on this strategy.
Gift Appreciated Stock
If you are planning on making a charitable contribution and you have stocks, ETF’s or mutual funds that have increased in value and are held in an after-tax account (not a qualified retirement account), you might consider gifting your investment directly to the charity of your choice. This will allow you to avoid paying capital gains taxes on selling the position to fund the gift.
Changes for 2019
Looking forward to 2019, the Standard Deduction amounts will change to $12,200 for single filers and $24,400 for married filers. Charitable donation deductions will be limited to a maximum of 60% of your income. The Adoption Credit is still in place for up to $13,810 and up to $14,080 for special needs adoptions. Student loan interest deductions are still a part of the tax law up to a maximum of $2,500 for single tax payers with income below $70,000 and married filers with income below $140,000.
Employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan will be able to save $19,000 per year in 2019. With the catch-up contribution limit of $6,000, employees over age 50 will be able to contribute up to $25,000 in 2019. Employees who participate in a SIMPLE IRA account will be able to contribute up to $13,000 in 2019, or $16,000 for employees over age 50.
Traditional IRA and Roth IRA contributions limits have increased to $6,000, or $7,000 if over age 50. Tax deductions for Traditional IRA contributions phases out for singles with income over $64,000 and for married filers with income over $103,000. There are no upfront tax deductions for Roth contributions. Even so, eligibility to contribute to the accounts is phased out for singles with income over $122,000 and married filers with income over $193,000. It may be possible to work around the Roth IRA income limitations using a strategy called a “Backdoor Roth.” If you would like to save in a Roth, but are prevented due to your income, we would be happy to review your situation.
Health Savings Accounts (HSA) are available if you participate in a High Deductible Health Insurance Plan, which is defined as a plan that has a deductible greater than $1,350 for single coverage or $2,700 for family coverage. If you are eligible for an HSA, you can contribute up to $3,500 to the account for single coverage participants or $7,000 for family coverage participants. HSA plans are the only savings vehicle that give you an upfront tax deduction, plus grows tax free, plus allows tax free withdrawals (if used for medical expenses). These are very valuable accounts, if you are eligible, and may be a useful tool for retirement planning.
This is just a sampling of some of the more common tax related laws and strategies. I hope you find the information useful. If this letter spurs you to think about a new strategy that we have not already discussed, please contact us with any questions.
Shane M. Alsworth, MBA, CFP®, CLU®, CIMA®
Michael P. Gilly, CPA
The views and opinions presented in this article are those of Shane Alsworth & Alsworth Capital Management, LLC only
Investments are subject to market risks including the potential loss of principal invested.
Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.