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It’s the 4^th quarter. The holidays are right around the corner. The last thing you may want to think about is income taxes … but there are some compelling reasons why you should be thinking ahead.

Last year’s tax season saw the biggest change to the tax code in over 30 years. At the end of the tax season, we noted that one of the lessons learned was that individuals who engage us in tax planning early, on average, fared much better than those who did not. There are some very important reasons for this:

On Friday, March 22, 2019, the Treasury and IRS announced they have lowered the withholding underpayment penalty threshold to 80%. This means that taxpayers who were 80% or less under-withheld on their income tax withholding or quarterly tax payments may qualify for relief.

Should I Take the Educational Tax Breaks or My Child?

Every year, a group of adventurous souls decides: This is the year I’m going to prepare my own tax return! While we certainly applaud an individual’s right to establish self-reliance and try to save money on preparation fees, it’s rarely a good idea.

Many higher income taxpayers have long made it a practice to open investment accounts for their children, hoping to take advantage of their lower tax rates.  Many years ago, Congress imposed, what is colloquially known as the “kiddie tax” to place strict limits on the amount of investment income that can be taxed at those lower rates. 

One of the changes made by the recently enacted Tax Cuts and Jobs Act of 2017 made some significant changes to how the “kiddie tax” is administered, impacting the way adults pass investment income on to their minor children. 

The "kiddie tax" is a provision that taxes the unearned income of children under the age of 19 and of full-time students younger than 24 at a special rate. Under both the new law and the old, the first $1,050 of a child's income is tax-free and the next $1,050 is taxed at a rate of 10 percent.

WASHINGTON — The Internal Revenue Service released Notice 1036, which updates the income-tax withholding tables for 2018 reflecting changes made by the tax reform legislation enacted last month. This is the first in a series of steps that IRS will take to help improve the accuracy of withholding following major changes made by the new tax law.

"As advertised, most taxpayers will see a reduction of their federal withholding as a result of the recently-passed Tax Cuts and Jobs Act (TCJA).  Keep in mind, though, that the full effect of the TCJA on individuals’ tax and financial situations will only begin to be known a year from now, when taxpayers begin to file their 2018 income tax returns," said Zinner Tax Partner Howard Kass, CPA, CGMA, AEP. 

Congress is enacting the most sweeping tax legislation in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there is still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way.

Here is a quick rundown of last-minute moves you should think about making.

Lower tax rates coming.

The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-throughs, such as partnerships and S corporations, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

·     If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way, you will defer income from the conversion until 2018 and have it taxed at lower rates.

·     If, earlier this year, you converted a regular IRA to a Roth IRA you may now be questioning the wisdom of that move, since the tax on the conversion would be subject to a lower tax rate had it occurred in 2018 . You have a very limited window in which you can unwind the conversion to the Roth IRA by doing a recharacterization.  This is accomplished by making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Beginning January 1, 2018, you will not be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.

·     If you operate a business that renders services and operates on the cash basis, the income you earn is not taxed until your clients or patients pay you. Therefore, if you hold off on billings until next year, or until so late in this year that no payment is likely to be received this year, you will likely succeed in deferring income until next year.

·     If, on the other hand, your business is on the accrual basis, deferral of income until next year is difficult, but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won't upset your customers). Taking one or more of these steps would postpone your right to payment, along with the income from that job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional's input.

·     The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction.

Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here is what you can do about this right now:

·     Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of state and local income or property taxes paid. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than December 31, 2017, rather than on the 2018 due date. However, do not prepay in 2017 a state income tax bill that will be imposed next year - Congress says such a prepayment will not be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before December 31, 2017, of a 2018 property tax installment is apparently OK.

·     The itemized deduction for charitable contributions will not be chopped, but, because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many, because they won't be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.  One option to consider if you want to accelerate your charitable giving is to contribute to a donor advised fund before year-end and disburse funds to the charities in the future.

·     The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. Keep in mind, however, that next year many individuals will only be able to claim the standard deduction because many itemized deductions have been eliminated. If you won't be able to itemize deductions after this year, but will be able to do so this year, consider accelerating "discretionary" medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies.

Here are some other last minute moves that can save tax dollars in view of the new tax law:

·     The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. In addition, for various deductions, such as depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won't be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.

·     Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after December 31, 2017, such swaps will be possible only if they involve real estate that is not held primarily for sale. So if you are considering a like-kind exchange of other types of property, such as an automobile trade-in, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property only if you either dispose of the relinquished property or acquire the replacement property on or before December 31, 2017.

·     For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. However, under the new law, for amounts paid or incurred after December 31, 2017, there is no deduction for such expenses. So if you have been thinking of entertaining clients and business associates, do so before year-end.

·     Under current rules, alimony payments are generally an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments will not be deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2018. So if you are in the middle of a divorce or separation agreement, be sure to keep this date in mind.

·     The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you are in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you are getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.

·     Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, you should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement. For example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that we have described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call us at 216.831.0733 or email info@zinnerco.com. We're happy to help and ready to start the conversation.