Trusts & Estates Magazine/WealthManagement.com published a slideshow authored by John O. McManus featuring 10 to-dos you should check off your list before the ball drops on New Year’s Eve. Check out the tips below — or view the full slideshow with photos.
Ten Tax Planning To-Dos Before Year End
John O. McManus | Dec 07, 2018
Discuss this checklist with your clients.
With less than a month left in 2018, time’s running out for your clients to finish their wealth management and tax planning to-dos. Many tax opportunities have an annual expiration date of Dec. 31, and this year presents unique possibilities. Here are 10 items your clients can check off their lists before the ball drops on New Year’s Eve.
- Freely give to help others live.
Clients should make annual exclusion gifts of up to $15,000 for individuals and $30,000 for married couples, per chosen loved one (per married couple).
Make gifts into trusts for children and grandchildren.
Contribute to an Internal Revenue Code Section 529 plan, which grows free of income tax.
Make unlimited gifts directly to educational institutions and medical facilities.
- Reap what you’ve sowed (and take your losses).
Clients should consider harvesting losses to offset capital gains realized in their securities portfolios.
- Your health is your wealth.
Advise clients to take advantage of this year’s lower threshold for Medical Expenses. For tax year 2018, the 2017 Tax Cut and Jobs Act reduced the floor (from 10 percent to 7.5 percent of adjusted gross income) that must be exceeded to take a deduction for Medical Expenses on one’s tax return. This is the last year to take advantage of this lower floor; so, if possible, your client should try to accelerate any medical transactions and purchases into the 2018 year.
- Use a tax rate in its infancy.
Review your client’s children’s portfolio income for application of the new Kiddie Tax. Prior to 2017, the children’s interest and dividends (unearned income) above $2,100 were taxed at your client’s top marginal tax rate. As a result of the Tax Act, this income will be taxed at the rates that are applicable to trusts. Trust rates are also at the top bracket, but the top rate starts sooner in the earnings curve.
When will your client’s child have to file a separate tax return?
- If their earned income, such as wages, exceeds $12,000; or
- If their unearned income (interest, dividends, capital gains) exceed $1,050; or
iii. If the child has both earned and unearned income, the child must file if the total exceeds the larger of: (i) $1,050 or (ii) the earned income plus $350.
- Your client should think about giving.
Bunch your client’s charitable deductions into the same year. The deduction for cash donations to public charities has increased to 60 percent of the taxpayer’s adjusted gross income.
Charitable donations should be combined every other year to exceed the new higher standard deduction ($24,000 married; $12,000 single). Otherwise, your client’s charitable gifts won’t enjoy a benefit.
If over aged 70½, your client should make a qualified charitable donation of his required minimum distribution from his individual retirement account; the income will be excluded from the return and taxable income.
Make gifts to charities and family foundations with appreciated assets:
1. Consider gifting low-basis stock (instead of selling the stock to raise cash for gifting that could lead to gains).
2. Determine liquidity needs in the foundation to meet the requirement to pay 5 percent of the value of a foundation’s net investment assets.
3. Fund a charitable remainder trust with concentrated positions in appreciated securities to diversify without adverse tax consequences associated with selling appreciated securities.
- Rocket fuel for your client’s investment vehicles.
Establish and fund qualified plan contributions.
Maximize your client’s Section 401k contribution, which would be $18,500 generally and $24,500 for clients over aged 50.
Consider making a gift of up to $5,500 to either a traditional or Roth individual retirement account for his children or grandchildren who aren’t funding their own IRAs but have enough earned income to report.
- Take a break to consider break-ups.
While we always support and encourage harmony and reconciliation, if there must be a decision to legally separate or complete a divorce, your client may want to do so before year end. Otherwise, moving forward, the payer of alimony will no longer get a deduction on their tax return, and the recipient will no longer have to include the alimony as taxable income.
- Don’t wait to compensate.
An owner of an S corporation must pay himself a reasonable compensation (what someone in a similar job would be paid). Therefore, make sure your client pays himself a salary before year end.
- Be bold and review client’s withholding.
The Tax Act lowered the tax rates and changed the tax bracket income ranges. Therefore, now’s the time for your client to do a “check-up” to see if the current tax withholding will be sufficient for next year’s income.
- Get in the groove to make a move.
Your client should make distributions of income from trust accounts and estate accounts to lower his income tax liability. Estates and trusts are taxed at the highest income tax rate (and a lower threshold at which the 3.8 percent Medicare surtax applies). Therefore, it may make sense for your client to distribute income to the beneficiaries to be taxed at the beneficiary’s lower income tax rate.