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Tax Topics: Year-End Planning, Gifting, and News from the IRS

Wealth Planning - JLFranklin Wealth Planning

This quarter, we’ve bifurcated this page with two important tax topics: year-end tax planning and an update about the Internal Revenue Service.

Money-Saving Tax Moves to Make Before December 31

In addition to time off and connecting with family and friends, the end of the year brings important tax planning opportunities. This is the time to assess your income and expenses and act prior to December 31 to lower your tax bill. Below are a few popular strategies.

Harvest Tax Losses

Sell positions at a loss; in some cases, you’ll want to buy replacement securities to maintain your asset allocation. Beware of the wash sale rule that prohibits taking a capital loss write-off if a substantially identical security is purchased within 30 days before or after the sale. Reinvested dividends count as purchases, as does a buy in an IRA or other tax-deferred account.

Fund Retirement Plans

If you have not done so already, maximize contributions to your 401(k) or other retirement plans. For 2018, the maximum 401(k) contribution is $18,500, plus $6,000 if you’re over age 50. If your company allows you to make post-tax contributions and convert them to a Roth IRA, consider doing so.

Make Gifts, Especially to 529 Accounts

The gift tax limit per person is $15,000 this year. Making bigger gifts requires you to file a gift tax return. If you are married, you and your spouse may give $30,000 to any one person. For those who are helping kids or grandkids with education expenses, you may give up to 5 years of gifts at once if you contribute to a 529 plan—that’s $150,000 if you’re married, $75,000 if you are single. Most people know that withdrawals from 529 accounts are tax-free, if used to pay for college; now, they can be used to pay for private K-12 tuition, as long as the annual withdrawal for non-college expenses is no more than $10,000. (Note that the California Franchise Tax Board does not recognize this withdrawal as tax-free on your state return.) Even if you are required to file a gift tax return, no tax will be due unless you’ve already made $11.18 million in gifts during your lifetime.

Bunch Itemized Deductions

The Tax Cuts and Jobs Act signed into law in the last few days of 2017 changed itemized deductions in a few ways. First, it gave a big bump to the standard deduction, now $12,000 for singles and $24,000 for married couples. If you’re over 65 you get another $1,600 ($1,300 for each married spouse). If your itemized deductions from items like state and property taxes (now capped at $10k for the year), mortgage interest, and charitable contributions exceed the standard deduction, then you’ll want to itemize. If your itemized deductions are close but don’t exceed the standard deduction and you plan to make additional charitable contributions next year, consider bunching those deductions in one year (and not making them the following year) to take the larger deduction, and take the standard deduction in the year you’re not itemizing.

Interpreting the New Tax Law at the IRS

The Tax Cuts and Jobs Act legislation has more than a few holes. As such, regulations and clarifications are ongoing. We wrote a summary of the new law back in January.

Fallout from the new law includes the possibility of a late start to the 2019 tax filing season. The IRS is developing or revising hundreds of tax forms and reprogramming computer systems. The new law will expire after 2025 as it is written, although Republicans will likely attempt to make it permanent.

At IRS headquarters, a host of issues is challenging the agency, including:

  • Insufficient Resources – As a result of underfunding for many years, technology is outdated, employees are inadequately trained, and audit rates have decreased.
  • Lack of Human Capital – Experienced auditors are retiring or leaving the IRS. Over 33% of workers at the agency are age 56 or older.
  • Cybersecurity Concerns – On an ongoing basis, fraudsters, scammers, and hackers attempt to break into the IRS’ data for the purpose of filing fraudulent tax returns and running away with the false refunds.

We will continue to notify our clients about tax planning opportunities during our annual review meetings.

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