4 Important End-of-Year Tax Considerations

November 16, 2018

Who does your taxes? And, more importantly, why do they get to do them?

What I mean is, when it comes to your retirement planning, your taxes and your investing, you’ve got to find an edge wherever you can.

It has long been my philosophy that maintaining symbiotic relationships between all these entities (financial planning, investing, tax planning) is vital.

So, does your accountant align your taxes with your investments and long-term financial planning concerns?

He or she better.

Because in light of 2018’s more restrictive tax laws, if there was ever an urgent time to bring these relationships into the same room, now is it.

The foundational change to our tax laws occurred when the “Tax Cuts and Jobs Act” doubled the standard deduction to $12,000 for singles, and to $24,000 for married couples who file together.

And yet that’s probably the most straightforward thing about the new law.

As we finish up 2018, and head into 2019, from a tax and financial perspective, what are some of the things you might need to consider right now?

1) What common deductions will you probably no longer take in 2018?

In light of the new tax law, most people think write-offs are a thing of the past.

The answer is more nuanced than that. Itemizing your deductions could still have a place in your filing repertoire, just probably not every year.

First, in 2017, about 30% of filers itemized their tax returns.

That’s over 40 million people.

But with a new tax law that limits or eliminates many deductions, that number is expected to drop to about 10% of all returns.^[1]

In regard to the new tax law, one of the reasons that most people will be forced to skip itemizing and go straight to using the standard deduction is a low, “hard cap” on many of the most popular write-offs. These include:

State and local tax deductions capped at $10,000
For newer mortgages, you can now only deduct the interest paid on your home if your mortgage is under $750,000
Discretionary medical expense write-offs are now only allowed if they exceed 7.5% of your adjusted gross income (this goes up to 10% in 2019)

So, should you just automatically take the standard deduction?

Maybe.

One approach might be to “group” your charitable giving and tax-friendly expenditures one year (and itemize), and then rein it in the next and go with the standard deduction.

2) It might actually be a good time to purchase a solar energy system.

With the application of the new laws, many people are indeed paying less in taxes, but everyone is still looking for an edge. One major potential deduction that still remains in place is the solar investment tax credit.

If you installed solar this year, you can deduct up to 30% of the cost of the installation from your federal income taxes.

Said Allworth Tax Solutions CPA Michael Mouriski: “While you can only claim the tax credit in the year you have the system installed, it covers both residential and commercial projects. And, as the phase out of this tax credit begins in 2020, if you haven’t already done it and a solar energy system makes logistical sense, right now (or in 2019) might be the year to consider it.”

3) 529 plans and saving for a relative’s education.

529 tax-advantaged savings plans are investment vehicles that were created to help pay for a relative’s college education. Money, including growth (when used by the “name” beneficiary for legitimate college expenses), is distributed tax-free.

The new law expands eligibility so that 529s can now be used to fund a child’s private, K-12 education, as well.

Not only can solo filers contribute $15,000 a year (it’s twice that for couples), there’s no gift tax.

Pretty nifty.

But that’s not all.

The law also allows folks with young relatives who have disabilities to now transfer up to $15,000 of unused 529 plan funds each year into an ABLE account. (ABLE stands for the Achieving a Better Life Experience Act.)

If you’ve got a disabled and eligible child in your life who could use a hand, the new tax law could be a great way to help out.

4) The new law, retirees, and IRA distributions and conversions.

Let’s say you’re a retired person who was a good saver. If you’re interested in reducing your tax bill, and you’ve long been an itemizer who donates to charity, one thing you can do is have some (or even all) of your IRA required minimum distribution go straight to the charity and not to you.

Doing this will keep the IRA distribution from being included as taxable income.

Another restriction that retirees must plan for is the change in the conversion rules around changing IRAs into Roth IRAs.

Each year, millions of people take their money out of a traditional IRA, pay the taxes on the growth, and convert it to a Roth IRA, where it grows tax free.

Old Law: In the past, you could actually reverse the transaction if you found out it was beneficial to do so from a tax perspective.

New Law: There’s no going back. Once you convert a traditional IRA to a Roth, you’re stuck.

Conclusion

I’ve seen innumerable scenarios where more cohesive planning between accountants and advisors could have saved clients serious money (and headaches).

With the expansion of our service offerings earlier this year to include accounting and bookkeeping, we’ve taken a major step to address this common problem by, figuratively, bringing these two important services under one roof.

Our clients who utilize both our retirement planning and tax services should see, at the very least, a major simplification in their financial lives.

I know I sleep better at night when I know these two vital personal financial entities are, not only working side-by-side, but are being managed by credentialed, fiduciary professionals like we have here at Allworth Financial and Allworth Tax Solutions.

[1] https://www.consumerreports.org/taxes/10-questions-to-ask-a-tax-professional-about-the-new-tax-law/

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