Although there are only a few weeks left in the year, it’s not too late to implement some planning moves to reduce this year’s taxes.
Save Bunches by Bunching
Beginning in 2018, many taxpayers who used to itemize in prior years will no longer do so because of the substantial increase in the standard deduction.
Example: In 2017, Fred and Wilma have charitable contributions of $5,000, mortgage interest of $12,000, property and property taxes of $6,000 for total itemized deductions of $23,000. Since their total itemized deductions of $23,000 exceed their $12,700 standard deduction, they will itemize.
In 2018, the standard deduction for a married couple is increased to $24,000. If they have the same itemized deductions in 2018, they will claim the standard deduction of $24,000 since this exceeds their itemized deductions of $23,000.
The bunching strategy involves incurring itemized deductions every other year rather than annually. The benefit of this strategy is more easily explained with an example:
In 2018, Fred and Wilma double their normal charitable contribution of $5,000 and make a $10,000 charitable contribution. They will not make a charitable contribution in 2019 (they are bunching two years of charitable donations in 2018). Their itemized deductions are: $10,000 of charity, $12,000 of mortgage interest, and $6,000 of property taxes for total itemized deductions of $28,000. Since this exceeds the $24,000 standard deduction, they will itemize. In 2019, they will take the $24,000 standard deduction. The total deductions over the two years is $52,000 ($28,000 itemized deduction in 2018 plus $24,000 standard deduction in 2019). If they continued to make $5,000 charitable contributions per year, then their itemized deductions would always be less than their standard deduction of $24,000 per year.
The benefit of this strategy is that they deduct $52,000 over two years with the bunching strategy rather than claiming the standard deduction of $24,000 per year (i.e., deducting $48,000 over two years). The additional $4,000 deducted over two years is roughly a $1,000 reduction in tax. They will once again bunch their charitable donations in 2020 and skip the donation in 2021.
Combine Bunching with Qualified Charitable Distributions
Taxpayers who have reached age 70½ who own IRAs and are thinking of making a charitable gift should consider making the donation through a qualified charitable IRA distribution—this is a DIRECT transfer from the IRA trustee to the charity. Such a transfer (not to exceed $100,000 per year) will neither be included in taxable income nor allowed as a deduction.
The benefits of this strategy are:
- AGI is not increased for purposes of the phaseout of any deduction, exclusion, or tax credit
- The distribution qualifies as a required minimum distribution
- It is not subject to the AGI phaseout of charitable contributions
- the taxpayer does not need to itemize to claim the charitable deduction (which is now more difficult due to the increased standard deduction)
To qualify, the distribution must be a direct transfer from the IRA trustee to the charity. If a taxpayer first takes an IRA distribution and then contributes it to a charity, the donation will not qualify as a qualified charitable distribution. It is also important that the taxpayer NOT receive anything in exchange for the contribution from the charity as this could also disqualify qualified charitable distribution treatment.
Make HSA Contributions
If you have a high deductible health insurance policy, you may qualify for deductible contributions to a Health Savings Account. A deductible above-the-line deduction of $3,450 for individual coverage and $6,900 for family coverage can be made as late as the original due date (generally April 15) of the tax year. For example, you can deduct an HSA contribution on April 15, 2019 on your 2018 tax return. If you are age 55 or above, you can contribute an additional $1,000 per year.
Nail Down Investment Losses
If you have paper losses on stocks it may make sense to sell the investments before year end to generate a deductible capital loss. The same investment can then be re-purchased at least 31 days later. This way, the taxpayer can realize her investment loss for tax purposes but still retain the same, or approximately the same, investment position. It is critical to wait at least 31 days before re-purchasing the stock to avoid the wash sale rules. These rules disallow losses on investments if the same or substantially similar investment is purchased within 30 days of the loss sale.
Capital losses reduce capital gains and can offset up to $3,000 of ordinary income per year. Excess capital losses are carried forward to future tax years.
This communication is not intended to be tax advice and should not be treated as such. You should contact your tax professional to discuss your specific situation.
Curcuru & Associates, CPA PLC, offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.