Last Minute 2018 Tax Tactics
- By Rick Sawyer
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- 17 Dec, 2018
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Things You May Need to Do Before December 31st
With the Tax Cuts and Jobs Act adding to the challenge of year-end tax decisions, we’ve already seen a few areas where our clients need to act immediately to help reduce their tax liabilities.
These issues don’t affect every taxpayer, but those who are impacted need to be proactive.
Retirement Plans
It’s a good idea every year to examine your retirement plans to make sure you are maximizing your allowable contributions, and 2018 is no exception.
The IRS has increased the contribution limits of 401(k) accounts to $19,000. The IRA limit was increased to $6,000.
Home Equity Line of Credit
If you used your home equity line of credit for anything other than home improvements, you should consider paying it off before the end of the month.
That’s because, with the new law, the interest may no longer be deductible. If you used the money to complete a renovation project, in most cases, you’ll be able to deduct the interest. If you used the money to pay off credit card debt, for example, the interest is not deductible.
Investments
If you sold assets like stocks at a profit this year, you may want to consider selling under-performing assets for less than you paid for them to minimize your tax liabilities. The strategy—called “harvesting losses”—uses losses to offset gains.
To implement this strategy properly, we recommend you discuss your intentions with your CPA or financial advisor to make sure you are in compliance with all of the appropriate government regulations.
Deductions
Under the new law, taxpayers have an incentive to look at their taxes over multiple years. Since the Tax Cuts and Jobs Act doubled the standard deduction, fewer people will benefit from itemizing deductions on a single year basis.
But by “bunching” deductions over several years, you have an opportunity to reduce your taxable income by shifting liabilities between years.
Let’s say you will take the standard deduction for 2018.
Then, instead of making charitable contributions and/or paying obligations like your mortgage by December 31st of 2018, you make those payments a day later, on January 1st of 2019. You’ve shifted those 2018 potential deductions to 2019.
In 2019, you'll pay your mortgage and make charitable contributions, etc., as you normally would, but before end-of-business on December 31st of 2019, you also make your 2020 annual payments and contributions.
You’ll take the standard deduction in 2020, but in 2019 you’ll be able to take three years of deductions against your 2019 taxes . . . which may be considerable depending on your personal financial situation.
Divorce
A not widely discussed aspect of the Tax Cuts and Jobs Act is that, starting with divorces finalized in 2019, alimony payments will no longer be tax deductible for the payer. (And the payee will no longer have to include alimony payments in his/her income.)
A divorce finalized in 2018 will be taxed according to the current regulations.
One area we’ve found challenging to some of our clients over the years is providing the right documentation to substantiate sizable charitable contributions.
The IRS recently published final regulations clarifying several aspects of charitable gift reporting:
Donations of cash
For contributions of $250 to $500
To claim a cash contribution of $250 to $500, you must obtain a contemporaneous (originating at the time as the gift) written acknowledgement from the recipient of the donation.
For contributions of more than $500
To claim a monetary gift of $500 or more, you need either a bank record or a written communication with the recipient showing the name of the recipient, the date of the contribution, and the amount of the contribution.
Donations of property
To claim a donation of property valued under $250, you must receive a receipt from the recipient or keep “reliable records.” (We encourage getting a receipt.)
To claim non-cash contributions valued between $250 and $500, you’re required to obtain a contemporaneous written acknowledgment.
To claim a donation valued between $500 but less than $5,000, you must obtain a contemporaneous written acknowledgment from the recipient and file Form 8283 using Section A, Donated Property of $5,000 or Less and Publicly Traded Securities.
To claim a non-cash donation valued between $5,000 and $500,000, in addition to a contemporaneous written acknowledgment, you must obtain a qualified appraisal and file Form 8283 using Section B, Donated Property Over $5,000 (Except Publicly Traded Securities).
To claim a non-cash contribution of $500,000 or more, you must meet the requirements for a contribution of $5,000 to $500,000 and attach the qualified appraisal to your return.
What’s a "qualified appraisal?"
The IRS regulations define a "qualified appraiser" as an individual with "verifiable education and experience in valuing the relevant type of property for which the appraisal is performed" (Regs. Sec. 1.170A-17(b)(1)).
We get it. Your career demands are too hectic day-to-day for you to worry about the end of your fiscal year . . . until we get to the end of your fiscal year. And since most of our clients operate as small businesses, their fiscal year usually coincides with the calendar year.
That means you’re simultaneously faced with booking and using your talent, dealing with holiday hassles, and getting your paperwork in order so your accountant can prepare your tax returns (personal and business).
Here are a few year-end tax prep tasks every client can do right now to help assure a trouble-free tax preparation and filing experience for 2018.
Get organized
CPAs generally charge by the hour. That means, if you bring us all your receipts in a shoe box, for example, your tax return will be done, but it will take us longer to sort through everything that’s in the shoe box. Just as in your business, time is money.
It’s best if all your invoices and receipts are recorded in the same format in the same software program or spreadsheet.
Get reconciled
Bank reconciliation should be ongoing on a weekly basis throughout the year, but we realize it’s one of those things that gets back-burnered in the pressure and fast-pace of your professional life.
What we’re looking for is documentation of a bank transaction that corresponds with each entry in your accounting system.
Evaluate quarterly payments
If you make estimated tax payments quarterly, check to see how they correspond to the actual end-of-year numbers you achieved. The process will give you a good idea of the amount you’ll get back or how much you’ll owe this year.
And it will give your accountant benchmarks that will come in handy while preparing your tax return.
Review your W-9s
If you hire freelancers, you must issue 1099 forms to every person you paid at least $600 to for contract labor. If you didn’t anticipate paying him or her that threshold amount, you may have overlooked having them complete a W-9 form at the time. You can still have any missing W-9s completed before the end of the calendar year.
Call your CPA today
For a successful CPA practice, every day during tax season is like Black Friday to retailers. We’re deadline driven to get every tax return prepared as accurately and efficiently as possible.
The sooner we can sit down with our clients to review appropriate records and start preparing the return, the more likely this year’s tax filing project will be smooth and stress free.
