New Look to 2018 Income Taxes

Taxpayers will soon be facing their first filing season under the Tax Cuts and Jobs Act of 2017.  What major differences will be noticeable?

  • There is no line on the 2018 Form 1040 for dependent and personal exemptions.

  • Standard deductions have almost doubled from 2017.

  • Taxpayers are limited to $10,000 for state and local taxes, such as real estate, state income and sales taxes.

  • Expenses for certain itemized deductions are not available.  These include income tax return preparation fees, safe deposit box rentals and unreimbursed work expenses.

  • New limits apply to the deduction for mortgages and home equity loans initiated in 2018.

  • Donors who make cash gifts to charity will be able to deduct up to 60% of their adjusted gross income, an increase from the previous limit of 50%.  Any excess can still be carried over for up to five additional years.

The combination of itemized deduction cutbacks and higher standard deductions means that fewer taxpayers will itemize on their 2018 returns.  If you discover that you can no longer itemize, consider ways to boost charitable deductions that will help you exceed the standard deduction for 2019.  These could include bunching several year’s gifts into one year or generating larger deductions by establishing a charitable remainder trust or charitable gift annuity, from which you can retain payments for life.

Be an IRA Early Bird

The contribution limit for IRAs increased to $6,000 for 2019, with an additional $1,000 allowed for eligible taxpayers age 50 or older.  You’ve got until April 15, 2020, to make contributions for 2019, but the earlier you put money into your IRA, the longer it has to grow tax-deferred.

IRA owners who have reached age 70½ have to plan for required minimum distributions.  Withdrawals from traditional IRAs are fully taxed.  There are no required distributions from Roth IRAs, and qualified withdrawals are tax free.

Eligible IRA owners — those age 70½ or older — should consider making qualified charitable distributions early in the year, before taking their full required minimum distribution.  Donors can give up to $100,000 annually to public charities (not private foundations or donor advised funds) and owe no federal tax on the amount of the gift (state taxes may be due in a few states). Although there is no charitable deduction available for a charitable gift from an IRA, donors can save taxes if the gift takes the place of their required minimum distribution.  For example, someone who must withdraw $36,000 from an IRA in 2019 will pay tax of $7,920 in a 22% tax bracket.  But if $5,000 is directed to a charity instead, the donor reduces the income tax by $1,100.  Many IRA owners take regular withdrawals throughout the year and may forget to set aside some for charity until year end nears.  It’s still possible to give to charity after the full required minimum distribution has been taken, but the tax savings are less.

Get 2019 Off to a Good Start

While the year is still young, there are several steps to consider to make 2019 a better year financially. 

Make gifts to younger family members — You can give up to $15,000 annually to as many people as you wish, gift tax free.  By giving early in the year, you’ll shift the income from your higher tax bracket.  Consider giving stock or other assets that are likely to appreciate.

Switch to tax-exempt income — One way to reduce your overall income tax burden is to invest in tax-free municipal bonds.  Although the interest is lower than that offered on commercial bonds, the tax savings make munis attractive, especially for taxpayers in higher tax brackets.  The earlier in the year you convert, the greater your tax savings.

Check your withholding and estimated tax payments — Make sure you’re paying in enough to the IRS through withholding and estimated payments to avoid a penalty, but don’t overpay.  Remember: A big tax refund next year is really an interest-free loan to the IRS.

Review your insurance coverage — Make sure the policies you have are sufficient, without providing unnecessary coverage.  You might want an umbrella policy that offers insurance beyond that available through regular homeowners and auto policies.  If you find you have life insurance that is no longer needed for family security, consider giving the policy to charity.  You’ll be entitled to a charitable deduction if you itemize.

Contribute to retirement plans — For 2019, the maximum contribution to an IRA is $6,000, with an additional catch-up of $1,000 for those age 50 or older.  The limit for 401(k) plans is $19,000, with a catch-up of $6,000.

Review your investments — Check with your investment advisor whether your portfolio is in balance, particularly in light of recent stock market gyrations.  If you have stock that has appreciated in value, consider a gift to charity.  You’ll avoid the capital gains tax and may be entitled to a charitable deduction.  There are even ways to retain payments for life from your gift.

Put Life in Your Living Trust

Revocable living trusts are often a valuable part of an estate plan.  In states where probate is time-consuming and costly, living trusts are almost a necessity.  Some tips to keep in mind:

  • A revocable living trust does not reduce income taxes.  During life, all income is taxed to the owner, just as if the income-producing assets were held outright.

  • Even with a living trust, you’ll still need a will to name an executor or appoint guardians for minor children, and to dispose of assets not already in your trust.  Your will can direct that such assets be distributed under the provisions of your living trust, thereby offering a measure of privacy.

  • Living trusts do not provide protection from creditors.  If you are concerned about asset protection, ask your financial advisor about other options, such as a family limited partnership or limited liability company.

  • Not everyone needs a living trust.  If your estate is small or uncomplicated, a living trust may not be of much value.  Ask your attorney whether a living trust is worth the cost you’ll incur setting it up and transferring title to the assets.

  • You can include gifts to charity in your living trust, either during lifetime or at death.