Income Tax Planning

Generally, individuals should accelerate deductions into 2018 and defer income into 2019 in order to defer taxes. Of course, this could change next year if we see another tax bill, but for 2018 planning, we’re going to walk you through the current rules.

Contribute the maximum to retirement plans for 2018

  • Traditional, Roth, or Custodial IRA: $5,500 ($6,500 if you're 50 or older). Note that IRA contribution limits will increase to $6,000 in 2019 ($7,000 if you’re 50 or older). Note also that the IRS formally approved the use of a “back-door Roth” where taxpayers may contribute to a traditional IRA and then move that contribution to their Roth IRA.
  • SEP-IRA, Qualified Retirement Plans: Lesser of $55,000 or 25 percent of compensation. SEP-IRA contribution limits will increase to $56,000 in 2019.
  • 401(k): Salary deferral of $18,500 ($24,000 if you're 50 or older). The salary deferral will increase to $19,000 in 2019 ($25,000 if you're 50 or older) so you should review your 401(k) withholding rates to maximize annual contributions next year.

Take advantage of the tax benefits of any employer tax benefits offered

Health Spending Accounts (HSA), Flexible Spending Accounts (FSA), and Dependent Care Benefits.

Contribute to education funding plans

Make contributions to 529 education funding plans because they efficiently shelter income on college accounts. We'd be happy to help you set up accounts or determine how much you should add to them. Note that, under federal law, up to $10,000 from 529 plans can be used for education expenses before college. That said, California did not comply with this rule, so gains from 529 plans to fund a private high school, for example, would be taxed by California.

Utilize education credits

Generate income or capital gains for any college-level children before year-end to utilize non-refundable education credits, if they are available.

​Replace a home equity line of credit with a margin loan

Interest paid on a home equity line of credit is no longer deductible (unless used to substantially improve the home). Investment interest expense is still allowable as a deduction, so it may be tax beneficial to pay off a line of credit and utilize a margin loan on your taxable brokerage account instead. We would be happy to discuss current margin rates available and determine the best loan strategy for your circumstances.

​Social Security benefits for December will increase in 2018 due to inflation

For family members with lower income who are subject to Social Security tax, accelerate income into 2018 to possibly reduce Social Security taxes next year. The limit on earnings subject to Social Security taxes will increase from $128,700 in 2018 to $132,900 in 2019. Note that Social Security benefits for 2019 will increase by 2.8% for inflation.

​Bunch Itemized Deductions into some years

Properly time your state income and real estate taxes (up to $10,000 annually), large charitable contributions, and non-life-threatening medical expenses, possibly saving you taxes if bunched in certain years. Many taxpayers, especially those without mortgages, will no longer be itemizing deductions in a typical year, but by bunching itemized deductions into some years, you may be able to clear the standard deduction amounts to itemize and reduce your taxes. For example, instead of gifting $10,000 annually to a charity, consider gifting $30,000 in one year (for three years’ worth of gifts) to hurdle the standard deduction.

​Contribute to a Donor Advised Fund

Establish or add to a Donor Advised Fund (DAF) if you're feeling charitably inclined and your income is high in 2018. We’ll be happy to discuss this with you before the end of the year. DAF's allow you to bunch charitable contributions into one tax year (maximizing the charitable deduction) while spreading the distributions to charities over future years.

​Make charitable contributions using appreciated assets

Make your charitable contributions with long term appreciated assets whenever possible, instead of using cash. Giving securities directly to a charity (or Donor Advised Fund) not only avoids capital gains taxes but also helps minimize your Adjusted Gross Income (AGI) which can reduce your overall tax liability.

Review any vested stock options

Review any vested stock options for year-end tax planning opportunities.

Maximize the new 20% deduction for qualified business income

The new tax law introduced a provision (IRC Section 199A) that allows certain taxpayers to deduct 20% of qualified business income (QBI) on their tax returns. Business income from sole proprietorships, partnerships, LLCs, and S Corps may qualify for the new deduction. Business owners at higher income levels ($207,500 for individuals, $415,000 for couples) may be limited or restricted from utilizing the deduction, so strategies to reduce taxable income under these thresholds may be appropriate.

​Roth IRA conversion

Consider converting a traditional IRA to a Roth IRA, if your income is lower this year, to benefit from a lower tax rate.

​Planning to move out of state?

If you’re moving out of state, plan the timing of certain transactions around your move date to be the most tax advantageous.

Make Qualified Charitable Distributions (QCDs) from your IRA

By making distributions of up to $100,000 directly from your IRA to a charity, you avoid including the IRA distribution in your income. This helps to reduce your AGI which is used in many limitations, lowering your taxes and sometimes, if applicable, Medicare premiums.

​Pay investment management fees for IRAs out of IRAs

Since investment management fees are no longer tax deductible for Federal purposes, fees for IRAs should be paid from IRA assets as these assets are pre-tax assets. Note that Vista adjusted its procedures for our client accounts because of this at the beginning of 2018.