Financial Planning

Fourth Quarter Checkup!

Couple in kitchen working with a financial advisor
 

While one doesn’t have to wait for the fourth quarter to check on these items, if you have not done it yet this year, now might be the time to get organized. The 2017 Tax Cuts and Jobs Act brought tax changes to many US citizens. Please discuss the following with your tax advisor to make sure some of these ideas make sense for your specific situation.

1. Review your Estate plan

Overall, it’s important to review the terms of your estate plan annually or when there is a significant change in your life, such as marriage, divorce, birth of a child, etc. With the latest overhaul in tax law changes, it may be particularly important to review your estate planning documents now considering the large increase in estate tax exemption to $11,180,000 for an individual or $22,360,000 per couple. Older documents may have made sense when the estate tax exemption was lower, but now may have unintended consequences. In addition, make sure that you have established appropriate beneficiaries for all retirement accounts and life insurance. Certain beneficiaries have distribution advantages over others.

2. “Paycheck” Checkup

In January 2018, the IRS provided new tax withholding tables to employers that could affect how much an employer is withholding on behalf of their employee. Confirm that your withholding on your paycheck is appropriate in light of the new tax law. In some cases, too much or too little may be withheld. There is a 2018 Withholding Calculator on the IRS website. If you decide to lower your withholding in 2018, it is a good idea to recheck your withholding rate at the beginning of 2019. If a change is warranted, you may need to submit a new W-4 to your employer.

3. Flexible Spending Accounts

Review any balances in your FSAs to make sure that you use any remaining money by your specific  “year-end” deadline or you may lose it. Some allow for a carryover of funds, and some may allow for a grace period past the deadline. Review what your plan offers.

4. Required Minimum Distributions (RMD)

Do not forget to take your RMD if required to do so. The penalty is one of the most onerous at 50 percent of the RMD amount you were supposed to withdraw.

5. Make a $15,000 gift

Remember to take advantage of the annual gift exclusion by making your gifts by December 31. The limit for gift-tax-free gifts this year is $15,000 per donor per recipient (which can be $30,000 per couple for each recipient).

A strategy for taxpayers who do not qualify for the 0 percent capital gains rate is to give appreciated securities to someone who does qualify, such as an adult child or elderly parent. The recipient may be able to sell the securities tax-free. In 2018, an individual can give up to $15,000 in cash or other assets per recipient to as many individuals as you would like without filing a gift tax return.

Income Tax Savings Strategies:

To itemize or not to itemize? That is the question!

Changes to the tax code have made it increasingly less worthwhile to itemize. For the 2018 tax year, the standard deduction has increased to $24,000 for married couples filing jointly vs. $12,700 for last year. And while personal exemptions have been eliminated, fewer filers are likely to itemize on their 2018 taxes, and not merely because of the increased standard deduction. In particular, the state and local tax (SALT) deduction, which has been one of the most significant deductions for taxpayers in the past, is now capped at $10,000.

If you have more than $12,000 in deductions as a single taxpayer or more than $24,000 in deductions as a couple, itemizing could save you money on your taxes. If your deductions are lower than these thresholds, then taking the standard deduction may simplify your taxes.

1. Tax Loss Selling

Talk to your advisor about selling equity or fixed income securities with significant losses. For mutual fund accounts not subject to sales charges, consider selling funds with capital losses this year and replacing them with similar style funds or ETFs. Consult with your Investment or tax advisor if the “wash sale” rule may apply to you.

2. Consider Deferring/Accelerating Income

Deferring income into 2019 may be a good idea for taxpayers who expect to be in a lower tax bracket next year, while accelerating income into 2018 may make sense for those who expect to be in a higher tax bracket next year. Employees may find it difficult to defer salary and wages into next year, but if you are self-employed, you might have more ability to defer. If your company offers a deferred compensation plan and you have the ability to do so, consider participating in the plan, but only after you understand the risks involved in participating in such a plan.

3. Consider Accelerating/Deferring Deductions

Since the standard deduction is considerably higher this year, if you are a taxpayer who will itemize or are close to the threshold to itemize, you might consider “bunching” your medical expenses and /or charitable contributions in one year to get over that threshold to itemize. Remember medical expenses are only deductible if they exceed a percentage floor of your adjusted gross income (AGI). The percentage floor for 2018 is 7.5 percent. In 2019 that floor increases to 10 percent. So it might be worthwhile to accelerate any deductible medical expenses into 2018 if you are going to itemize. That means your medical bills will be far less burdensome, since you can deduct more of the costs when you file your taxes.

If charitably inclined, you might also consider making two years of contributions in the same year if you itemize or are close to itemizing and wish to do so. This is called “bunching” and may allow a taxpayer to itemize in a specific year whereas they might not otherwise be able to do so. Consult with your tax advisor about ways of using this approach that would be most beneficial for 2018 and 2019.

4. UTMA/UGMA Transfer

If you have a child with a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account, consider selling any depreciated securities and transferring the cash to a 529 Plan. While the income in a Traditional UGMA or UTMA account is taxable, income from a 529 Plan is tax-free if used for qualified post-secondary educational expenses or up to $10,000 for qualified K-12 expenses.

5. Make a Charitable Contribution (Cash or Appreciated Stock)

Charitable donations are still deductible under the new tax law, but with the loss of the state income tax deduction and the doubling of the standard deduction, many people will be claiming the standard deduction instead of itemizing. Do not limit yourself to cash gifts. Many large charities accept donations of appreciated securities. If you have owned a stock or other security for more than a year, you can deduct its value on the day you make the donation. You will not pay tax on the gain, and neither will the charity. Another option is to donate appreciated stock or cash to a donor advised fund, which allows you to take the deduction on your 2018 tax return and distribute the funds later. Potential donors should consult with their tax advisors.

Retirement Planning

1. Contribute to Qualified Retirement Plans

The maximum compensation that can be used to determine qualified retirement plan contributions is $275,000 in 2018. If you have a qualified retirement plan, consult with your tax advisor so you can budget and pay this year’s contributions prior to the deadline.

If you contribute to a 401(k) plan, review your contributions and decide whether you can or want to make additional contributions (the Deferral Limit is $18,500 for 2018, with a $6,000 catch-up contribution if you are age 50 and over).

Consider the type of 401(k) deferral to be used if a Roth 401(k) option is offered. The basic difference is when you pay the taxes. If your employer offers both, you do not have to choose one over the other. Consider splitting contributions between the two. As with Roth IRAs, Roth 401(k)s allow tax-free qualified distributions and do not require RMDs at age 70 1/2 if you are still working and own less than 5 percent of the company. You can avoid taking RMDs from your Roth 401(k) by rolling the money into a Roth IRA after you leave your job. Please note that if you wait until 70 ½ to rollover the funds, you will have to take that year’s RMD before rolling the money into a Roth IRA.

2. Traditional IRA Contributions

In 2018, you can make an IRA contribution of up to $5,500 with an additional catch-up of $1,000 if you are age 50 or older. Your contribution is fully deductible if you are not a participant in a qualified plan or if your adjusted gross income is at or below $63,000 for singles, $101,000 for married couples filing jointly (where both spouses are covered by a plan) or $189,000 if only one spouse is covered by a qualified plan. The contribution may be partially deductible if adjusted gross income is below $73,000 for singles, $121,000 for married couples filing jointly (where both spouses are covered) or $199,000 if only one spouse is covered by a qualified plan. You have until April 15, 2019 to make a contribution.

You can still make an IRA contribution if your AGI is over the limit or you are covered by a qualified plan. The contributions will not be deductible but the money in the plan will still grow tax-deferred. Once you make a non-deductible contribution to a traditional IRA, you may want to consider converting it to a Roth IRA and allowing it to grow tax free. This is called a Roth “back door” contribution and is an effective way to get money into a Roth IRA when you are unable to contribute to one. There are several “traps” and things to consider with this strategy. Please consult with a tax advisor that is knowledgeable about Roth conversions before doing one. Under the 2017 Tax Cuts and Jobs Act, taxpayers who convert a traditional IRA to a Roth IRA will no longer be able to use “re-characterization” to unwind the Roth conversion.

3. Roth IRA Contributions

As with the Traditional IRA, the 2018 contribution limit for a Roth IRA is $5,500 or $6,500 for those over the age of 50. You will not get a tax deduction, but your distributions at retirement will be tax free. To make a full contribution your AGI must not be more than $120,000 if single and $189,000 if married filing jointly. Partial contributions are available if income is less than $135,000 if single or $199,000 if married filing jointly. Unlike Traditional IRAs, contributions can be made after age 70 ½. You have until April 15, 2019 to make a contribution. Under the 2017 Tax Cuts and Jobs Act, taxpayers who convert a traditional IRA to a Roth IRA will no longer be able to use “re-characterization” to unwind the Roth conversion.

4. Qualified Charitable Distributions in 2018

Individuals over 70 ½ are able to make a distribution of up to $100,000 directly from their IRA account to a Qualified Charity, without reporting that distribution as income. Distributions may not be made to donor advised funds or private foundations. Donations count as part of the IRA owner’s required minimum distribution (RMD). This could allow you to still qualify for tax breaks tied to your AGI and reduce or eliminate taxes on Social Security benefits.

5. Medicare Premiums: Rules for Higher Income Beneficiaries

An adjustment to Medicare Part B and Part D premiums is required by law for those with higher incomes. Whether your Medicare premiums will increase is determined by your modified adjusted gross income (MAGI). This determination affects those with a MAGI greater than $85,000 for individuals and $170,000 for married couples filing jointly. Your MAGI is equal to your total adjusted gross income plus any tax-exempt interest income and is based on the amount you reported on the previous year’s tax return. Clients should analyze their MAGI and budget accordingly for any Medicare premium increases in the year ahead. Consult your tax advisor on any strategies, such as the Qualified Charitable Distribution listed above, that may be available to keep your MAGI below the applicable limits. If your income has gone down during the year, and the change makes a difference in the income level Social Security considers, you may want to contact Social Security to see if your premiums can be reduced.

6. Open Individual 401(k)/Keogh or Individual Defined Benefit Plan

The maximum contribution to an Individual Defined Contribution plan is $55,000 for 2018. A Defined Contribution plan is similar to a 401(k). The $55,000 maximum contribution includes employer contributions, employee elective deferrals, but does not include catch-up contributions. The annual additions to an individual’s account cannot exceed the lesser of 100 percent compensation or $55,000 (not including catch-ups).

The contribution limit for a Defined Benefit Plans is much higher at $220,000. You must establish your account by December 31, but have until your tax filing deadline (including extensions) to make the actual contribution.

Education and Disabilities Accounts

Many families face a choice. Do they use a 529 Plan for all of their children’s college savings and K-12 tuition? Or do they use a $2,000 maximum contribution into a Coverdell and contribute the remaining annual gift tax exclusion dollar amount into a 529 Plan?

1. Contribute to a 529 Plan – Cash Only

You can contribute up to $15,000 (or more with gift tax consequences) of your annual gift tax exclusion ($30,000 for married couples filing jointly). Alternatively, you may elect to front-load five years’ worth of annual gifting to make an immediate contribution of $75,000 ($150,000 if a split gift with spousal consent) into a 529 Plan for one beneficiary. 529 Plans are open to everyone regardless of income level or age of the children or grandchildren.

The 2017 Tax Cuts and Jobs Act expanded the benefits under 529 Plans to include distributions that are qualified for kindergarten through 12th grade up to $10,000 per year. Please discuss the payment of Private School expenses out of your 529 Plan with your advisor as it may make more sense to leave the 529 Plan untouched in order to grow. Remember that grandparents or others may make certain direct payments to an educational institution for tuition without that payment being considered as part of their annual exclusion gifts or subject to gift tax.

2. Consider making a Coverdell ESA Contribution (too?)

The maximum contribution for 2018 is $2000. There are several differences between a Coverdell (ESA) and a 529 Plan, which may have you wanting to consider both options. A Coverdell ESA allows you to self-direct your investments. In most cases, investments in a 529 Plan are limited and may be age-based. The other major difference is that, in addition to college expenses like a 529 Plan, Coverdell ESAs can be withdrawn tax-free for a broader range of K-12 expenses like room and board. 529 Plans are limited to tuition (up to $10,000 per year) for K-12. Unlike the 529 Plan, balances in a Coverdell ESA must be distributed by age 30 (unless the beneficiary has special needs). In addition, the ability to contribute to a Coverdell ESA phases out above a Modified Adjusted Gross Income of $95,000 for single taxpayers and $190,000 for married couples filing jointly.

3. Achieving A Better Life Experience (ABLE) Accounts

These plans, created in 2014, allow parents and others to save for a disabled young person’s needs. Money in an ABLE account is typically disregarded when determining eligibility for federal benefit programs such as Medicaid and Supplemental Security Income (although there may be a payback upon death). While not tax deductible in 2018, an individual can contribute up to $15,000 a year to any ABLE account. All investment earnings remain untaxed if distributions are used for “qualified disability expenses.” As usual, always consult your advisor to see how this type of account might fit into your overall plan.

When in Doubt, Ask an Advisor or Tax Professional

One of the big reasons for tax reform was to simplify the tax code. But if you look at the new set of provisions, you will see that they're still fairly complex.

It always pays to consult a professional when you have questions about anything tax-related, whether it's filing your taxes, claiming deductions on a return, or planning for the future. If you follow some of these tips, you'll be more likely to save money and simplify the process of dealing with tax-related matters.

Are you ready for 2019? 

Reach out to your SunTrust Private Wealth advisor to help you prepare for the year ahead.

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* SunTrust Bank and its affiliates and the directors, officers, employees and agents of SunTrust Bank and its affiliates (collectively, “SunTrust”) are not permitted to give legal or tax advice. Clients of SunTrust should consult with their legal and tax advisors prior to entering into any financial transaction. 

Before investing, investors should consider whether their home state or their designated beneficiary’s home state offers any state tax or any other benefits such as financial aid, scholarship funds, and protection from creditors that are only available to residents of that state. Any state tax benefits associated with a 529 plan apply only to residents of the state sponsoring the plan. 529 plans value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost.

Investors should consider the investment objectives, risks, charges and expenses of the plan carefully before investing. An official statement, which contains this and other important information, can be obtained from your financial professional. Please read carefully prior to investing.

Withdrawals may be subject to state income taxes depending on the participant’s state of residence. Non-qualified withdrawals are subject to a 10% penalty.

Participation in a 529 plan does not guarantee that contributions and the investment return, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend and institution of higher education.

Neither SunTrust Banks, Inc., nor any of its affiliates underwrite 529 plans. 529 plans are offered by SunTrust Investment Services.

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