The Tax Cut and Jobs Act of 2017, which became effective for tax years starting in 2018, significantly impacted many taxpayers. The change impacting the most taxpayers was the enhanced standard deduction and loss of many itemized deductions. Tax forms were also presented differently making it difficult for taxpayers who reviewed their returns in detail to compare year-to-year. While there were many changes, there are still some important tax savings strategies that may help you pay less in taxes. Which ones apply to your situation? Ask yourself the following questions:
Do you expect a significant change in income from the prior year?
Coordinating the timing of significant one-time increases in income can make a big difference. If possible, try to spread gains across two tax years. For example, you may want to avoid selling a rental property in the same year you exercise stock options. Significant one-time decreases (like a one-time business loss or large capital loss) can provide an opportunity for “gain harvesting” (recognizing gains in lower income years). If you find yourself in a lower tax bracket than usual, it can also be a good time to discuss converting IRA funds to a Roth.
Are you above age 70.5?
If so, consider making any charitable contributions directly from your IRA. These charitable distributions can satisfy your required minimum distribution. Qualified charitable distributions are not included in your adjusted gross income, which determines the amount of your Social Security that is taxable, whether you are subject to Medicare premium surcharges and also income thresholds for medical expenses if you itemize. Also, if you take advantage of the increased standard deduction, this is a strategy to ensure your charitable contributions are still deductible. If you are interested in this strategy, be sure to discuss Schwab’s “charitable checkbook” option with us.
Do you own rental property?
Make sure we discuss whether you have any suspended or carryforward operating loss (Schedule E). Many rental property owners show a taxable loss (even if there is a cash profit) and if your income is above $150,000, the loss may be suspended. It is then taken in the year you sell the property, which can make taxable income vary significantly from one year to the next and present tax planning opportunities.
Do you have a Capital Loss Carryforward?
A Capital Loss Carryforward can present opportunities to rebalance your portfolio while minimizing the tax impact. We consistently review your portfolio to determine if there are tax losses that should be recognized to off-set capital gains. Schedule 1, line 13 lists capital gains and if your return reflects a loss of $3,000, you likely have a Capital Loss Carryforward. Also, depending on your investment accounts, this can provide an opportunity to manage taxable income and convert tax-deferred accounts to a Roth IRA.
Do you have taxable income under $78,750 MFJ or $39,375 Single (or gross income under $105,000 MFJ or $51,375 Single)?
If so, your income places you in the 0% capital gains rates. This provides an opportunity to recognize capital gains and pay 0% tax. This applies to securities and rental properties or other capital assets.
Are you approaching Social Security age?
Making your decision about when to start collecting Social Security will significantly affect your long-term financial plan and should be discussed with your advisor. You should also determine the percentage of your Social Security which will be taxable. You can have tax directly withheld from Social Security payments (similar to withholdings from your IRA distributions or W2 income), which can help avoid surprises at tax time.
If any of these tax planning opportunities seem to apply to you, we look forward to working with you (and your CPA) to discuss the best “next steps” to take to reduce your tax bill.