Tax Law Creates Opportunities and Pitfalls for Year-End Planning

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Most provisions of last December's Tax Cuts and Jobs Act (TCJA) came into effect for the 2018 tax year. The law changes some tax-saving moves taxpayers may consider prior to the end of the year.


One of the most important provisions of TCJA for many individual taxpayers was the near doubling of the standard deduction. The 2018 standard deduction amounts are $24,000 for joint filers, $18,000 for heads of households, and $12,000 for others. Combined with TCJA's $10,000 cap on state and local taxes, these increases make it less likely individuals will benefit from itemizing deductions in 2018.


However, a bunching strategy may enhance the use of itemized deductions. For example, a married couple who normally donate $5,000 to charity and have $18,000 of other deductions might consider donating two years' worth ($10,000) to charity before the end of 2018, then skip charitable contributions in 2019. Their 2018 itemized deductions of $28,000 will exceed the standard deduction by $4,000. In 2019, when their deductions total only $18,000, they will use the $24,000 standard deduction. Over both years, they will deduct $4,000 more than if they continued to donate $5,000 each year.


Many traditional year-end strategies, like accelerating deductions and deferring income, continue to apply. But the effects of TCJA on these strategies should be considered. For taxpayers who have already reached the $10,000 maximum deduction on state and local income and property taxes, there is no longer an advantage for making additional tax payments before year end. The same applies to miscellaneous itemized deductions like unreimbursed employee business expenses, which not allowable at all under TCJA. The alternative minimum tax, which can compound tax planning, will impact far fewer taxpayers than in the past. Reviewing the securities in your portfolio to determine if stocks with losses should be sold to offset capital gains realized elsewhere is still a viable strategy.


TCJA lowered the floor for claiming deductions for medical expenses in 2018 to 7.5% of adjusted gross income for all taxpayers, but that floor increases to 10% in 2019 (TCJA Alert #24). Taxpayers who have the ability to accelerate deductible medical expenses - for example, prescription eyewear or elective procedures - may find those deductions easier to claim in 2018 than 2019.


Although most TCJA changes are already effective, its alimony changes don't apply until January 1, 2019 (TCJA Alert #17). Alimony or separate maintenance payments for divorce and separation agreements entered into after December 31, 2018 are no longer deductible by the payor, nor includable in the income of the payee. Couples in the midst of a divorce involving alimony payments should consider whether finalizing the agreement before the end of the year might work to the advantage of both parties.


New GOP Tax Proposal Unlikely to Pass Lame Duck Congress

On November 29, the House voted 219 to 181 to bring a new 297-page tax package to the floor. It addressed year-end tax extenders, retirement savings, disaster relief, IRS reform, and technical corrections to TCJA. Notably, it did not include the centerpiece of the Republicans' Tax Reform 2.0 effort - making TCJA's individual and business tax cuts permanent. The $54 billon legislation is unlikely to garner the nine Democratic votes needed to pass in the Senate. Late on November 30, House leadership pulled the package from the floor for several reasons, including absent members and controversy surrounding certain provisions.


Contact your LM Cohen professional if you have questions about the impact of TCJA on your year-end tax planning. All our prior Tax Cuts and Jobs Act Alerts are available on the Updates page of our website.

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