When is a loss actually a gain? When that loss becomes an opportunity to lower tax liability, of course. Now’s a good time to begin your year-end tax planning and attempt to neutralize gains and losses by year end. To do so, it might make sense to sell investments at a loss in 2018 to offset capital gains that you’ve already realized this year.
Now and later
A capital loss occurs when you sell a security for less than your “basis,” generally the original purchase price. You can use capital losses to offset any capital gains you realize in that same tax year — even if one is short term and the other is long term.
When your capital losses exceed your capital gains, you can use up to $3,000 of the excess to offset wages, interest and other ordinary income ($1,500 for married people filing separately) and carry the remainder forward to future years until it’s used up.
Research and replace
Years ago, investors realized it could be beneficial to sell a security to recognize a capital loss for a given tax year and then — if they still liked the security’s prospects — buy it back immediately. To counter this strategy, Congress imposed the wash sale rule, which disallows losses when an investor sells a security and then buys the same or a “substantially identical” security within 30 days of the sale, before or after.
Waiting 30 days to repurchase a security you’ve sold might be fine in some situations. But there may be times when you’d rather not be forced to sit on the sidelines for a month.
Fortunately, there’s an alternative. With a little research, you might be able to identify a security in the same sector you like just as well as, or better than, the old one. Your solution is now simple and straightforward: Simultaneously sell the stock you own at a loss and buy the competitor’s stock, thereby avoiding violation of the “same or substantially identical” provision of the wash sale rule. You maintain your position in that sector or industry and might even add to your portfolio a stock you believe has more potential or less risk.
If you bought shares of a security at different times, give some thought to which lot can be sold most advantageously. The IRS allows investors to choose among several methods of designating lots when selling securities, and those methods sometimes produce radically different results.
Good with the bad
Investing always carries the risk that you will lose some or even all of your money. But you have to take the good with the bad. In terms of tax planning, you can turn investment losses into opportunities — and potentially end the year on a high note.
Smart timing of deductible expenses can reduce your tax liability, and poor timing can increase it unnecessarily. One deductible expense you may be able to control to your advantage is your property tax payment.
You can prepay (by December 31) property taxes that relate to 2018 (the taxes must be assessed in 2018) but that are due in 2019, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to 2019 (they must be assessed in 2019) and deduct the payment on this year’s return. Also, beware of the dollar-amount limitation discussed below.
A big decision
Accelerating deductible expenses such as property tax payments is typically beneficial. Prepaying your property tax may be especially advantageous if your tax rate under the Tax Cuts and Jobs Act (TCJA) is expected to decrease in the next year. Deductions save more tax when tax rates are higher.
But not every tax rate has dropped for the 2018 tax year under the TCJA — the very lowest rate, 10%, has been retained, as well as the 35% rate (though the income brackets for these rates have changed). So, some taxpayers may not save any more by prepaying. Also, taxpayers who expect to substantially increase their income next year, pushing them into a higher tax bracket, may benefit by not prepaying their property tax bill.
Another important point is that, under the TCJA, for tax years 2018 through 2025 the itemized deduction for all state and local taxes is limited to $10,000 ($5,000 for married filing separately).
Property tax isn’t deductible for purposes of the alternative minimum tax (AMT). So, if you’re subject to the AMT this year, a prepayment may hurt you because you’ll lose the benefit of the deduction. Before prepaying your property tax, make sure you aren’t at AMT risk for 2018.
Also, don’t forget that, for 2018 to 2025, the TCJA suspends personal itemized exemptions but roughly doubles the standard deduction amounts (for 2018) to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. This may affect your decision on whether to prepay.
Not sure whether you should prepay your property tax bill or what other deductions you might be able to accelerate into 2018 (or should consider deferring to 2019)? Contact us. We can help you determine your optimal year-end tax planning strategies.
By Michael Cohn
The Tax Cuts and Jobs Act that President Trump signed last December promises to give small business owners a tax reduction of up to 20 percent for 2018, but there has been a lot of confusion about which businesses will qualify for the deduction and other tax breaks. The IRS has issued some guidance and proposed regulations that can be used to help determine which companies and individuals can benefit from the pass-through tax deduction and how it can be calculated.
William Norwalk, a tax partner at Sensiba San Filippo, a Bay Area-based accounting firm that works with many small and midsized businesses across a variety of industries, has been giving his clients advice on the new deduction.
“One client had done a lot of investing in tax-advantaged type of investments over the last couple of years, sold his business, and received a large sum of money,” he said. “Ultimately we had encouraged him to recognize the income on that in 2017 instead of 2018 because the California state tax was a huge deduction that was going to go away. In his case, to minimize the overall tax on the gain, it was smarter for him to time that sale in 2018 and have the income happen that way. This year we’re dealing with the fact that he had all that money coming in, but the business that was generating the money was no longer in his portfolio, so the character of his income changed a lot and he got tax-advantaged investments that are going to create losses early on. We were looking at the fact that he may have an opportunity to take money out of a retirement account and we would accelerate the withdrawal of money out of the retirement account because he could absorb that amount of income this year without generating significant tax. So in his case it was the combination of last year knowing how the law was going to change, implementing it to benefit last year, but then as things developed this year, it actually switched and we’re trying to jam income into this year to offset those losses.”
By Michael Cohn
The Tax Cuts and Jobs Act that Congress passed last December produced some winners and some losers among different categories of taxpayers. With Congress now considering new legislation to extend some expiring tax breaks along with correcting technical problems with last year’s tax overhaul and fixing the IRS, one company is providing a list of the biggest winners of the TCJA.
Earlier this month, TaxAudit, a tax audit defense service, came out with a list of the biggest losers (see Some taxpayers expected to lose out under new tax law). On Wednesday, it predicted the biggest winners (not counting corporations, whose top tax rate was slashed from 35 to 21 percent). The list focused on individual taxpayers.
· Homeowners: Those with home mortgage loan amounts above $750,000 and equal to or less than $1,000,000 for home acquisition, building or improvements, where the loans were originated prior to or on Dec. 15, 2017.
· Itemizers: Taxpayers in states with low or no state income tax rates and property tax rates, and whose combined state and local taxes are below $10,000, and whose total itemized deductions exceed the new standard deduction.
· Self-employed taxpayers: Self-employed taxpayers whose income is within the limits for the new Section 199A deduction for business will benefit from the new 20 percent deduction.
· Retirees: Some retired individuals may benefit from the increased standard deduction if they have not been able to itemize in the past. They may also benefit from a lower marginal tax rate.
· Parents and taxpayers with dependents: Taxpayers whose children are under the age of 17 will benefit from the increased Child Tax Credit which has a much higher income limitation, while eligible taxpayers with non-child dependents will benefit from a new $500 credit.
· Wealthy taxpayers: High-income taxpayers will enjoy lower tax rates, while people who will inherit extremely large amounts of money will benefit from the estate and gift tax exemption for 2018 being increased to $11,180,000 after considering the necessary inflation adjustment on $10,000,000.
· Soon-to-be divorced taxpayers: Taxpayers who must pay alimony and whose divorces were finalized before Jan, 1, 2019. will still be able to deduct alimony. The deduction of alimony will no longer be a valid deduction for those that are divorced after Dec. 31, 2018. Similarly, taxpayers who receive alimony and will have a final divorce decree after Dec. 31, 2018, as the requirement to include alimony as income is no longer required.
· Certain factors, such as a home office (not as an employee, however), can help to maximize your home mortgage interest deduction.
· Taxpayers with foreign taxes paid generally would benefit by using Form 1116 if they are over the $10,000 limit.
There is a new $500 credit for eligible taxpayers who support a dependent that is not eligible for the Child Tax Credit.
“Tax professionals have spent a lot of time this year understanding how the new tax law will finally impact taxpayers this coming season, and it’s becoming clearer who the likely winners and losers of the tax overhaul are,” said TaxAudit chief customer advocacy officer Dave Du Val in a statement. “Whether or not you benefit under the new tax law, it’s important to take the time to understand the new rules for proper tax planning for 2019 – and now is the time to do it. No one should have to pay the IRS more than they legally owe.”
by James Edward Maule
The December 2017 tax cut legislation has wrought all sorts of damage to the American economy. Some taxpayers not in the top one percent rejoiced when they received tiny raises or paltry bonus payments, but many of them, unlike the still-too-poor one percent, will be forking those dollars back to the Treasury come tax filing season in early 2019. Job numbers appear better, but it’s a short-term phenomenon and most of the new jobs are minimum wage opportunities. The federal budget deficit is growing as though it were on steroids.
Now comes more bad news. One of the claims made by the proponents of the always-failing supply-side, trickle-down economic theory was that the reduction in corporate tax rates would bring back into the United States money stashed overseas by corporations. Supposedly, the return of this money would create jobs, though the fallacy in that claim is that corporations do not simply create jobs because they have money, they create jobs if they need workers, and if the 99 percent cannot afford to purchase the goods and services offered by the corporation then the corporation doesn’t create jobs. At one point, the administration that pushed the 2017 tax legislation, despite having promised to push legislation that allocated all of the tax cuts to the 99 percent, claimed that the reduced corporate tax rates would cause $4 trillion in cash to come back into the country from overseas. Now comes news that, once again, reality trumps theory and boasting. According to this Bloomberg report, the repatriation of these earnings started off slowly and slowed even more. During the first quarter of 2018, the first after the enactment of the 2017 tax cut legislation, corporations brought $295 billion of earnings back into the United States. During the second quarter, the amount dropped to $170 billion, and the estimate for the third quarter is between $50 billion and $100 billion. That’s a total of $515 billion to $565 billion. That’s just about halfway to ONE trillion dollars, and it’s nowhere near FOUR trillion dollars. Not even close. And one doesn’t need to be a mathematician to figure out that each new quarter will bring diminishing amounts, so that after ten years it’s unlikely that much more than one trillion might be repatriated.
Many companies are keeping their cash overseas, and some have publicly announced that they are doing so. One reason is that many other countries impose “onerous” taxes when the money is taken out of their jurisdiction. I wonder if the architects of the “lower tax rates and the money will cascade into the United States” theory paid attention to the realities of a global economic marketplace. They were too busy, I think, selling the false claim that corporate tax rates in the United States were the highest in the world to pay attention to the reality of other countries’ exit taxes.
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
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