Typical tax moves for the last six weeks of the calendar historically involved assembling forms for the spring filing, strategic buying and selling of portfolio investments and streamlining income for advantage in more than just one tax year. Reform, however, has made for new end-of-year tax considerations.
“Traditional approaches to year-end tax planning continue to make sense,” said Gregory Horning, a CPA/PFS and director at SC&H Group in Sparks, Md. “The changes to tax law that are effective for 2018 have added significant additional wrinkles to the planning.”
“The question is navigating to minimize the impacts within the landmine field of [tax] laws, regulations and reporting requirements,” said Daniel Morris, a CPA and senior partner at Morris + D’Angelo CPAs in San Jose, Calif. “That’s bad enough. In 2018, add a blindfold to befuddle our navigation. Taxes are likely down for most high-net-worth families—not by a lot, but by something.”
Beginning this year, many taxpayers who claimed itemized deductions year after year will no longer be able to do so. The basic standard deduction has been increased from $12,000 to $24,000, depending on your client’s filing status. Many itemized deductions have been cut back or abolished. Your high-net-worth client can still itemize medical expenses to the extent they exceed 7.5 percent of AGI, as well as state and local taxes up to $10,000, charitable contributions and interest deductions on a restricted amount of qualifying residence debt.
Said Gail Rosen, a CPA and shareholder with Wilkin & Guttenplan, Martinsville, N.J., “Some may be able to work around the new reality by applying a bunching strategy to pull or push discretionary medical expenses and contributions into the year where they will do some good.”
“People generally are surprised that folks won’t be itemizing anymore,” added Angie Zirkelbach, a CPA and director in the Indianapolis office of Blue & Co. Many clients, she added, are looking at whether they can use the newly restricted mortgage-interest deduction, as well as considering making large, deductible charitable contributions late in this year, sometimes by bunching donations together. “Donor-advised funds are popular,” Zirkelbach said.
“Making an additional mortgage payment before the end of the year can give some additional mortgage interest that may allow you to itemize,” said Brian Stoner, a CPA in Burbank, Calif. “Also, if you’re in an industry that has a lot of unreimbursed business expenses, becoming an LLC or S-Corporation can allow you to structure salaries and income to allow you to continue to deduct these expenses and more than offset the additional costs of maintaining the entity. The problem is the entity creation is more of a long-term plan for the following year to show the tax savings.”
The 20 percent deduction for qualified business income is among reform changes likely to need planning from many high-net-worth clients. “For QBI, business owners need to consult with their advisors to ensure that their business qualifies,” Horning said. “Complexity around these changes is significant and we still don’t have all the guidance we need to be sure how some of these rules will be interpreted. In some cases, there’s still time to make necessary changes for 2018.”
Among other year-end considerations:
• The 3.8 percent surtax on certain unearned income. “You start paying when the lesser of your net investment income or excess modified AGI exceeds $125,000 to $250,000. ... As year-end approaches, a taxpayer should look to minimize or eliminate the surtax depending on their anticipated income,” Rosen said.