CHICAGO, December 18, 2018 – As the clock ticks down on 2018, there are still some tax-saving moves to consider before year’s end. The passage of the federal Tax Cuts and Jobs Act (TCJA) affecting the upcoming tax season might cause taxpayers to do some “crunching” and “bunching.” That is… crunching numbers and bunching deductions.
The Illinois CPA Society provides some year-end tax planning clarity before time runs out.
- Bunching deductions – With the TCJA ushering in new higher standard deduction levels, those who regularly itemize their taxes – by adding up deductions for charitable contributions, mortgage interest and state and local taxes instead of taking the standard deduction – may benefit by “bunching” their itemized deductions.
- New standard deductions - Levels have been raised to $12,000 for individuals and $24,000 for couples. Child credits have also been raised to $2,000 per child.
- New itemized deductions – State and local tax deductions are capped at $10,000, which may be far lower than many taxpayers are used to seeing.
Bunching deductions would mean accelerating charitable contributions or tax payments before the end of the current year, instead of making them the following year.
For example, a single taxpayer with total itemized deductions of $10,000 (including $5,000 in charitable contributions) would benefit by taking the new standard deduction of $12,000. However, if that person accelerates their planned 2019 charitable donations of $5,000 into this year, that would create an itemized “bunched” total of $15,000 for 2018, which would be $3,000 more than the standard deduction.
For 2019, that same taxpayer may then claim the standard deduction of $12,000, since their itemized deductions (minus their usual charitable contributions) would be lower. So, by bunching charitable contributions one year and then taking the standard deduction the following year, it creates a 2-year tax deduction total of $27,000 ($15,000 + $12,000), instead of $24,000 worth of standard deductions only. The taxpayer may then repeat this bunching pattern every other year.
As with all qualified charitable contributions, make sure you get a receipt or written proof of the donation.
- Making advance mortgage payments – Homeowners who can afford to prepay their January mortgage payments in December may benefit from deducting additional mortgage interest on their 2018 returns.
- Beware of the Alternative Minimum Tax (AMT) – Although the TCJA has eased rules subjecting taxpayers to the AMT, accelerating deductions for 2018 might still cost you more in taxes by inadvertently triggering the AMT.
- Use stock market losses to offset capital gains – In order for investors to potentially recover what they may have lost during the year, they must have accurate records detailing harvested capital losses to offset realized capital gains.
- Kiddie Tax changes – The TCJA also revamped the Kiddie Tax rules. A portion of a child or young adult’s unearned income is now taxed at rates paid by trusts and estates. Those rates may be lower than a parent’s marginal rate, which was the previous Kiddie Tax rate.
- Maximize retirement plans contributions – Contributing to your 401(k), 403(b), SAR-SEP, or individual retirement account (IRA) plans may substantially lower your taxable income.
- For 401(k)s – The maximum 401(k) contribution allowed for 2018 is $18,500 ($24,500 if you are age 50 or over).
- For IRAs – Taxpayers have until April 15, 2019 to make IRA contributions attributed to 2018. $5,500 is the maximum traditional IRA contribution allowed. ($6,500 if you are age 50 or over). Be aware that there are income levels and other qualifications which may limit the tax deductibility of IRA contributions.
- Defer expected income – Deferring income until next year means it won’t count toward your 2018 income taxes.
Don’t go it alone! Find a CPA near you!
Taxes are always complicated, and recent changes can add to the confusion. The Illinois CPA Society has a free “Find a CPA” online directory that allows individuals, businesses and not-for-profit organizations to conduct a simple search for a CPA by location, type of services needed, industries served and language preference.