September 25, 2018 By Roger Russell
Even though the Tax Cuts and Jobs Act has been with us for nearly a year, most taxpayers still aren’t aware of the steps they should take between now and year’s end to improve their position. By taking appropriate measures, it is possible to maximize the benefits and minimize the burdens under the new law. The issues aren’t the same as last year, when no one knew what the tax landscape would be after the first of the year. The issue now is that much is new, and more complex.
To increase the likelihood of a “pleasantly surprised” taxpayer come tax season, a number of experts shared what they would advise doing between now and year’s end. Here are their suggestions.
Special thanks to Sheila Clark, director of The Income Tax School, Tynisa Gaines, assistant director of The Income Tax School; Roger Harris, president of Padgett Business Services; Mark Luscombe, principal federal tax analyst for Wolters Kluwer; Mike McCarthy, principal at Rehmann; Cathy Mueller, director of operations for Peoples Income Tax; Tom Wheelwright, chief executive of WealthAbility; and Beanna Whitlock, a San Antonio-based practitioner and educator and former IRS director of National Public Liaison
Fine-tune the W-4
Revise W-4s before year-end to more closely match remaining withholding for the year to expected tax obligations. The savings that taxpayers anticipate might have already been given to them through withholding. If they’ve been receiving a bigger paycheck, it won’t be there — or worse, they may owe money.
Look at pay in pass-throughs
If a small-business client is eligible for the 20 percent deduction for pass-through entities, determine whether there are any changes in the compensation structure they can make that will maximize the deduction.
With the new higher income limits for individuals exposed to the Alternative Minimum Tax, more taxpayers will have the opportunity to recapture the AMT paid in prior years. Tax professionals can calculate prior years’ AMT credit now and the taxpayers affected can reduce their withholding and enjoy the benefit early.
Always, always, always save
Maximize retirement plan contributions before year end. This is a perennial suggestion, as far too many taxpayers fail to make the most of their 401(k)s and other savings accounts.
Sell stocks that may produce a loss. Taxpayers can deduct up to $3,000 ($1,500 for married filing separately) of their excess losses, which reduces overall income. If the taxpayer sold stocks that resulted in a gain, selling stocks that produce a loss will offset the gain.
Clean out FSAs
Review flexible spending accounts to determine if the account balance can be used before the plan’s deadline. Funds not used by the account deadline will be lost, so taxpayers need to schedule medical appointments, buy new glasses or buy health care items covered by FSA.
Build that cryptocurrency paper trail
Advise clients who buy, sell or mine cryptocurrency to get accurate records in order. Taxpayers without accurate records could be subject to higher-than-normal gains.
Check out ‘reasonable comp’ rules
Make sure an S corporation owner’s salary meets the “reasonable compensation” standard – what they would need to pay someone else to do the job they do. If they have not taken a salary, they should do so by the end of the year.
Compare reduced itemized deductions to which the taxpayer might be entitled this year to the new standard deduction. If they won’t benefit from increasing itemized deductions such as charitable contributions (because the standard deduction will be greater), they can consider bunching charitable contributions into every other year, setting up a donor-advised fund, or, if over 70-1/2, making charitable contributions through IRA distributions. If they are taking the deduction this year, they can add to it by cleaning out closets, dressers, and storage areas and donating unused items to charitable organizations such as Amvets, Goodwill, and the Salvation Army.
Hit in the high-tax states
Those subject to the $10,000 deduction cap on state and local taxes, they should preserve real estate tax deductions by allocating to a business return whenever possible.
Enhance insurance coverage due to the loss of personal casualty and theft-loss deductions that are not part of federally declared disasters.
Get some big wheels
Buy an SUV or truck that is heavier than 6,000 pounds for a business to take bonus depreciation up to 100 percent of the cost of the vehicle.
Go for a cost-seg study
If the client has purchased or is purchasing real estate by year’s end to rent out or use in business, do a cost segregation study so they can capture the bonus depreciation on land improvements and contents of the building.
Pick the right date to split
If client is in the middle of a divorce, finalize the divorce before the end of 2018 so they will be able to deduct alimony paid to their spouse. If client will be the recipient of the alimony, they might want to put off finalizing the divorce or cut a deal to increase payment – after 2018 they won’t pay tax on the alimony.