Why Year-End Planning in 2018 is More Important Than Ever

Matt Mercer

K. Matthew Mercer, CPA2

Charles P. Schulz

Charles P. Schulz1, AIF®

2018 has proven to be a year unlike many others as the United States experienced the biggest tax law overhaul in decades with the Tax Cuts and Jobs Act (TCJA). Much has been written about the implications for the average taxpayer, and we at Krilogy Financial® and Krilogy® Tax Services have been advising clients on issues such as charitable giving strategies, distribution strategies, and other areas impacted by the new tax code.

As we near the end of the year, we sat down to compile a list of eight timely planning ideas (in no particular order) you should be considering in both your year-end planning, and looking forward into 2019.

  1. Work with your tax and financial planning team to identify how the TCJA will affect your tax returns.
    There are many items in the TCJA that could be favorable for your situation, such as the lower tax rate structure. However, many deductions, exclusions, and credits you may be used to taking have been modified or eliminated, while several new tax rules were added. Many of those provisions are set to ‘sunset’ after 2025, making it critical to consider how that affects planning strategies today given the possibility of rules expiring in the future. With such significant changes, it is in your best interest to meet with your financial team sooner rather than later to identify strategies to minimize your tax exposure.
  2. Deduction ‘bunching’
    The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions and nearly doubled the standard deduction ($12,000 for singles and $24,000 for married couples filing jointly). Like many taxpayers, you may have itemized in the past and find that your deductions no longer eclipse the standard deduction for 2018. You might want to consider strategically ‘bunching’ multiple years of deductions into one year. Expenses such as state estimated tax, property tax, large medical expenses, or charitable contributions could help with bunching. When filing this way, you alternate itemizing on taxes one year and taking the standard deduction the next.
  3. Develop a long-term, tax-friendly charitable giving strategy
    There are a number of options for charitable giving that you may want to consider in light of the new tax laws. In recent years, we’ve seen the Donor Advised Fund (DAF) grow in popularity as a tax-beneficial and efficient way for clients to execute their ongoing charitable giving. A DAF allows for the tax-free transfer of assets into an account earmarked for charity. They’ve become even more beneficial with recent tax law changes as donors consider their long-term giving strategy. Similar to deduction “bunching” above, funds representing several years’ worth of charitable contributions may be transferred into a DAF to help you meet the standard deduction, with a minimum required transfer of $5,000. You take the write-off in the year assets are transferred, and all growth in the account is tax-free. Additionally, if you are age 70-1/2 and are required to take required minimum distributions (RMDs) from your IRA accounts, a qualified charitable distribution (QCD) will allow you to directly transfer that money tax-free to a charity of your choice.
  4. 70-1/2 Means RMDs
    Speaking of age 70-1/2, if you’ve reached that magic age, it means that you’ve reached the promised land of the required minimum distribution (as mentioned above). Some may not want or need to take the money and, as discussed above, may want to consider a Qualified Charitable Distribution, or making a contribution to a grandchild’s 529 college savings account. Others may not realize that they’re off track with what the IRS requires to be distributed by December 31. If you’re unsure, or are looking for alternative strategies for your RMDs, reach out to your advisor for guidance.
  5. Take Advantage of Tax Loss Harvesting
    A well-diversified portfolio contains assets that behave differently over market cycles. There may be holdings in your portfolio with unrealized losses this year or from years past. Work with your advisor to identify any assets you may be able to sell at a loss to offset taxes owed on capital gains and income. For more information about tax loss harvesting, please review this recent article by Krilogy Advisor Kevin Reynolds who explains the process and how you may benefit.
  6. Get Up-To-Speed on Gift Tax Rules
    There are new allowances and considerations when it comes to gift taxes this year. For example, the lifetime estate and gift tax exclusion doubled to $11.18 million for individuals and is scheduled to be cut to around $5.5 million at the end of 2025. High net worth individuals may want to review existing estate plans with their attorney and discuss gifting ahead of 2026 to ensure assets are transferred tax-free. You may also want to consider things like large lifetime gifts while the exclusion is doubled. A special 529-plan exclusion allows you to bundle as much as five years’ worth of gifts at once (up to $150,000 for married couples, provided no other gifts are made within the next five-year period). Some may worry that could grow into more than is needed for qualified expenses; did you know that the state of Missouri now allows you to use a 529 plan to pay for K-12 tuition? That’s right, it’s not just for college anymore. In addition, The Achieving a Better Life Experience (ABLE) Act of 2014 was enacted to help blind or disabled individuals save money in a tax-favored ABLE account to maintain health, independence, and quality of life. The Tax Cuts and Jobs Act of 2017 allows for rollovers in limited amounts from a 529 plan to an ABLE plan without federal tax consequences. For more information, reach out to your advisor or CPA for guidance.
  7. Small Business Owners: Understand New Rules and Opportunities
    Many small business owners may not be aware of new opportunities for deductions. For example, if you’re a business owner of a pass-through entity such as an S-corporation, sole proprietorship, or partnership, you may be able to deduct up to 20% of Qualified Business Income (QBI) on your tax return. This requires additional calculations and documentation, so for this to be an option, be sure to talk with your tax professional before the end of the year. An additional strategy for small-business owners who will record a Net Operating Loss (NOL) this year, is using it to their advantage. NOLs may be applied against roughly 80% of ordinary income on future tax returns. Carrying forward large NOLs to offset additional income, from a Roth IRA conversion for example, might make sense for some. Calculating and applying NOLs is very complicated. Make sure to consult with your CPA or tax professional for guidance.
  8. Contribute to an HSA
    If you are enrolled in an eligible high-deductible health plan, you can contribute to a Health Savings Account and receive a tax deduction. Contribution limits for 2018 are $3,450 for a single person and $6,900 for a family (plus an additional $1,000 if over age 55). As previously discussed in this detailed article by Krilogy Advisor Michael DiSalvo, contributions lower your taxable income as they are made pre-tax, earnings from interest and investments grow tax free, distributions for qualified medical expenses are tax-free, and any unused balance automatically rolls over each year, remaining indefinitely until used. Is it too late for this year? You can contribute to an HSA up until filing your 2018 tax return and subsequently reimburse yourself for qualified medical expenses accumulated throughout the year.

Krilogy is proud to offer a team of tax professionals3 and financial advisors who work seamlessly to help clients with all of their financial planning and tax planning needs. We understand the implications of the TCJA, and how it can impact your financial situation in ways previous tax laws did not. We’re always just a phone call away to answer any questions you may have, and look forward to supporting you on your journey to financial accomplishment.

1 Krilogy Financial, LLC Financial Advisor
2 Krilogy Tax Services, LLC, CPA
3 Krilogy Financial, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. Krilogy Tax Services, LLC is an affiliate of Krilogy Financial and provides separate tax services for a fee.

Important Disclosures:
Investment Advisory Services offered through Krilogy Financial®, an SEC Registered Investment Advisor. Please review all prospectuses and Krilogy Financial’s Form ADV 2A carefully prior to investing. This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements.

All expressions of opinion are subject to change. This information is distributed for educational purposes only, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services, nor is it to be construed as individualized advice or recommendations suitable for the reader.

Diversification does not eliminate the risk of market loss. Investments involve risk and unless otherwise stated, are not guaranteed. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful. Past performance is not a guarantee of future results.

Krilogy Financial, its employees and financial advisors cannot provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advices. You should consult your attorney or qualified tax advisor regarding your situation. Krilogy Tax Services, LLC is a separate but affiliated company to Krilogy Financial and provides separate tax services for a fee. Services and products offered through Krilogy Financial® are not insured and may lose value. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.