2018 Year-End Tax Planning for “Making Your List and Checking It Twice”

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Act”) into law. The Act made significant changes to taxation of individuals and businesses. As the end of 2018 approaches, Attorney Matt Schippers notes the following tax provisions for year-end 2018 tax planning:

1. Standard Deduction and Itemized Deductions.

As to individuals, the Act increases the 2018 standard deduction to $12,000 for single taxpayers and $24,000 for married filing jointly taxpayers. With this increased standard deduction, fewer taxpayers are expected to itemize deductions beginning in 2018. When evaluating whether a taxpayer’s itemized deductions will exceed the new standard deduction, a taxpayer should consider the following:

  • As to the charitable contribution itemized deduction, the Act increased the limitation of the deduction from 50% to 60% of adjusted gross income (AGI). To maximize deductions, a taxpayer may consider aggregating donations by making a larger charitable donation in one year in order to itemize in that year.
  • As to the home mortgage interest itemized deduction, taxpayers are entitled to claim an itemized deduction for qualified interest paid on up to $750,000 of home mortgage debt ($375,000 for married taxpayers filing separately). Interest paid on home equity loans may be deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
  • The Act caps the state and local tax itemized deduction (for state and local property tax and state and local income tax or sales tax) at $10,000 per year ($5,000 per year for married taxpayers filing separately) for 2018.

2. Retirement Account Contributions.

Regarding retirement account contributions for individuals, the 2018 contribution limits are $18,500 for a 401(k) and $5,500 for an IRA. Taxpayers who are 50 years of age and older may make catch-up contributions of $6,000 to a 401(k) and $1,000 to an IRA. Contributions to IRAs are subject to certain phase out limitations. The Act repealed an individual taxpayer’s ability to reverse a traditional IRA conversion to a Roth IRA by October of the following year, a strategy referred to as “recharacterization.” However, the Act eliminated prior restrictions on Roth conversions, so now all taxpayers are allowed to convert a traditional IRA into a Roth IRA.

3. Annual Gift Tax Exclusion.

The Act doubled the estate and gift tax exemption for estates of decedents dying and gifts made after 2017 and before 2026, resulting in an $11.18 million exemption for 2018. Even with this increased exemption, individual taxpayers should consider the annual gift tax exclusion, which is $15,000 per year per donee for 2018. Accordingly, individual taxpayers may gift up to $15,000 to each donee free of gift and estate tax.

4. Depreciation of Business Property.

The Act included the following provisions as to depreciation of business property:

  • The Act allows a taxpayer to elect to expense up to $1 million per year for depreciable tangible property used in an active trade or business, such as equipment, machinery, office equipment, livestock, and certain qualified real property. The Act imposes a phase-out beginning at $2.5 million of qualified acquisitions. These changes are effective for property placed in service in taxable years beginning in 2018s.
  • The Act allows bonus depreciation of 100% for new and used assets acquired after September 27, 2017 and before January 1, 2023. Bonus depreciation generally applies to depreciable business assets with a recovery period of 20 years or less, including machinery, equipment, computers, appliances, and furniture.

A summary should not be considered legal advice. For specific questions about how the Act has affected you or how specific adjustments this year might affect your taxes next year, contact the Tax Attorneys of TWG.


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