PNC CENTER FOR FINANCIAL INSIGHT Six Year-End Tax and Financial Planning Ideas A Focus on How Sweeping Changes are Affecting Planning. Now is the time to make sure you are taking full advantage of the extensive changes that will affect this year s tax returns. PNC Center for Financial Insight SM builds bridges from thought to action, creating practical, applicable strategies to help benefit you and your family. This article includes items for you to consider with your tax, legal, and accounting advisors. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. This year the wealth planning landscape has been affected not only by significant tax reform, but by the return of market volatility. We believe it is wise to review plans before year end to explore tactics that may reduce this year s taxes and enhance your wealth plans overall. Below we focus on strategies most affected by the events of this year and actions that would need to be taken by year end. Idea 1: Explore Tax-Loss Harvesting Market volatility has returned with a vengeance this year. 1 This sharp rise in volatility may mean you have incurred losses. You may be able to use them to decrease your 2018 tax bill through tax-loss harvesting. Tax-loss harvesting generates capital losses by selling assets that are currently worth less than what you paid for them. These losses are then used to offset capital gains recognized during the year. At some point in the future, the plan may be to repurchase the asset. If you recognize a loss, you must wait at least 31 days to repurchase the same asset or the tax loss will be disallowed. 2 ¾ Planning Point: If your capital losses exceed your capital gains, you can use up to $3,000 of the excess loss to offset other income. Any remaining capital losses can be carried forward to future years. 3 For example, if you sell an asset and recognize a $15,000 capital loss and have $10,000 of capital gains, you can then claim zero gains for the year. Additionally, you can use $3,000 of your remaining $5,000 in capital losses to offset other income in 2018. The remaining $2,000 may be used to reduce taxable income in 2019. Idea 2: Revisit Deferred Compensation Arrangements Before making 2019 elections to nonqualified deferred compensation arrangements, we believe it is important to have an analysis run to determine the attractiveness of deferring income and if so, the deferral timing. Deferred compensation plans allow highly compensated employees to postpone receiving a portion of their 1 In 2017, the S&P 500 ended the day either up or down 1% or more on eight occasions. This occurred 36 times in the first half of 2018. 2 Internal Revenue Code (IRC) 1091(a). 3 IRC 1211(b)(1) and 1212(b)(1).
August 2018 2 income to a future year. The idea is to lower income levels during highearning years. The income is then paid out at a future date chosen by the employee, typically at a time when overall income, and its corresponding tax bracket, is lower. Additionally, during the deferral period the income may be invested in a selection of investments set by the plan provider and grow on a tax-deferred basis. If an employee leaves employment, the plan typically returns the participant s vested balance at that time. 4 Under The Tax Cuts and Jobs Act (TCJA) most taxpayers are now in lower tax brackets, but the lower tax rates are scheduled to expire at the end of 2025. This means that income deferred to 2026 and beyond may be subject to higher tax rates than would now apply. The decision as to whether to defer income, the timing of deferred compensation distributions, and changing existing election dates, if possible, is complex. It is impossible to know what future tax rates may be, though it is possible to project what income may be at the time the compensation is taken and how deferred compensation fits in with other available planning strategies. The Internal Revenue Service (IRS) requires deferred compensation elections to be completed prior to December 31, 2018. 5 Many employers require elections to be finalized earlier. Idea 3: Double-Check Withholding Payments The IRS significantly reduced the withholding tables after the TCJA became law. As a result, the amount of federal tax withheld from your salary may be significantly less than in previous years. This lower withholding may not be enough to satisfy your federal tax liability. This means you may owe taxes, and you may also be subject to interest and penalties. The IRS has published a simplified withholding calculator that can provide a rough estimate of overall withholding and income taxes for 2018. 6 ¾ Planning Point: By updating/ changing your W-4, your employer can adjust the amount withheld from your salary to cover any shortfall, negating potential interest and penalties. If you simply cut a check and pay the IRS, you may still be open to interest charges. ¾ Planning Point: If you are subject to taking required minimum distributions (RMDs) from a defined contribution plan, such as a 401(k) or IRA, it may make sense to increase the amount of tax withheld from the RMD to cover any tax payment shortfall. Just as with salary withholding, taxes withheld from RMDs can reduce or negate interest and penalty fees. Idea 4: Maximize the Benefit of Charitable Contributions Tax reform greatly increased the standard deduction and suspended or limited several itemized deductions beginning this year. This means that fewer people will benefit from itemizing. People with itemized deductions greater than or close to the standard deduction may want to consider maximizing the 4 The timing of payments is determined by the deferral agreement, subject to IRS requirements under IRC 409A. 5 First-time deferrals and performance-based compensation may have different deadlines under IRC 409(a)(4)(B). 6 This calculator should not replace a discussion with your tax advisor, but may provide a place to start the conversation. https://www.irs.gov/individuals/irs-withholding-calculator.
August 2018 3 Year-End Planning Checklist Each year we believe it is important to review the following list of planning todos and strategies. Take RMDs Remember to take RMDs from traditional IRAs, 401(k)s, and 403(b)s. 7 Failure to do so may result in a hefty 50% federal tax penalty on any portion of the RMD not taken. Retirees generally are required to begin taking RMDs by April 1 of the year after they attain age 70-½. 8 Thereafter, RMDs must be taken every year by December 31. Make sure you have charitable receipts To claim an income tax deduction for a donation over $250, you must obtain a written acknowledgement of your donation from the charity. Donors need to maintain a copy of the transaction for donations less than $250. Evaluate annual exclusion gifts If you wish to transfer assets, consider doing so before year end. Every individual can make annual exclusion gifts of up to $15,000 per person to anyone without it counting against the lifetime gift exemption of $11.18 million. Married couples who elect to split gifts can gift up to $30,000 per donee. 9 The annual exclusion expires on December 31 and cannot be carried over into 2019. Consider discretionary trust distributions Trustees might want to consider, when permissible, distributing some trust income to beneficiaries if they are in a lower income tax bracket than the trust. For example, a trust reaches the 37% tax rate with taxable income of $12,500 while individuals reach this rate at taxable income of $500,000, or $600,000 for married filing jointly. Weigh deferring income Consider postponing the recognition of income until 2019 if it makes sense. For example, selling an asset in January will push the income, and the capital gain tax, into 2019. Minimize exposure to net investment income tax (NIIT) and Medicare surtax Some taxpayers may be subject to an additional 3.8% NIIT and a 0.9% Medicare surtax if their adjusted gross income (AGI) is greater than $200,000 or $250,000 if married filing jointly. 10 Review strategies to lower AGI, such as delaying recognition of income and maximizing contributions to tax-deferred accounts, including 401(k), simplified employee pensions and health savings accounts. 7 This includes Roth 401(k) and Roth 403(b) accounts as well. Roth IRA accounts do not require RMDs. 8 RMDs generally are not required from company-sponsored plans, including 401(k) and 403(b) plans, while the account owner is still employed with that company. See the article Required Minimum Distributions, produced by the PNC Center for Financial Insight, for additional details. 9 Both spouses must be U.S. citizens or residents. Gift tax returns must be filed to evidence gift splitting. 10 For the purposes of the NIIT, AGI is adjusted with respect to foreign income and the related foreign tax credit.
August 2018 4 benefit of their charitable contributions in 2018. Below are some strategies that may help you accomplish this. Consider cash Cash contributions to public charities, such as churches, hospitals, and schools, are deductible up to 60% of AGI while most contributions of appreciated securities are limited to 30% of AGI. 11 It may be more beneficial to gift cash. Factors such as your AGI, the amount you wish to contribute, and investment portfolio considerations need to be weighed. Bunching contributions This entails making larger contributions less often so you can accumulate deductions and itemize. For example, if a married couple (filing jointly) contributes $15,000 per year to charity, assuming no other itemized deductions, they will not exceed the $24,000 standard deduction and will not receive a tax benefit for their contributions. However, if they contribute $30,000 every other year, they should be able to itemize in the year they make the charitable contribution and benefit from an additional $6,000 deduction that year. ¾ Planning Point: A donor-advised fund (DAF) can be an effective vehicle when bunching charitable contributions. This is because you are eligible to take an income tax deduction in the year the contribution is made to the DAF, but there is no RMD that needs to be made in any given year. 12 The cost of a DAF should be factored into the decision if this is an option for you. Qualified Charitable Distributions (QCDs). Individuals aged 70-½ and older may make qualified distributions from their IRAs directly to qualified charities up to $100,000 annually. These distributions are not taxable federal income for the donor and count toward the IRA s RMD. 13 Particularly, for those who are no longer itemizing, a QCD is an attractive option to satisfy charitable goals tax efficiently. Idea 5: Look at Contributions to 529 Plans 529 plans can be an excellent way to save for educational expenses. The recent tax legislation has expanded their use to include distributions of up to $10,000 per year for elementary and secondary school tuition, transforming them from a college savings account to a lifelong educational savings vehicle. A unique feature of 529 plans is they allow donors to front-load accounts with up to five years of annual exclusion gifts. This means that in 2018 you can contribute up to $75,000 ($150,000 for a married couple) to a 529 plan and still qualify for annual exclusion gift treatment. 14 529 plans grow tax free and distributions for qualified educational expenses are also tax free. Most states offer a state tax deduction for 529 contributions. Note: Most states follow federal tax rules for 529 distributions, but not all. Confer with a tax advisor who understands the laws of your state to determine how these rules will affect you. 11 Additional limits may apply for appreciated property and other assets. IRC 170. 12 Refer to the article Donor-Advised Funds, produced by the PNC Center for Financial Insight, for additional details. 13 Refer to the article Qualified Charitable Distributions, produced by the PNC Center for Financial Insight, for additional details. 14 Contributions to a 529 plan will count as a gift to the beneficiary of that account. Maximizing contributions to a 529 plan means you cannot make annual exclusion gifts to or for that beneficiary for the next four years.
August 2018 5 Idea 6: Consider Accelerating Medical and Dental Expenses This year medical and dental expenses are deductible to the extent they exceed 7.5% of AGI. Beginning in 2019, these expenses must exceed 10% of AGI to be deductible. If you itemize and have large medical or dental expenses, consider paying these expenses in 2018 to the extent it makes sense. Medical and dental expenses include payments for medical or dental care for you, your spouse, or your dependents. Qualified expenses include payments for doctors or dentists, prescription drugs, health insurance premiums, certain longterm care premiums, 15 and other costs including health-related lodging and mileage. This year has been marked by significant change on all fronts. As year-end approaches, it is a good time to review wealth plans so they address and take advantage of the new tax environment. It is equally important to reflect on what is truly most important to you so that your plans can help achieve those goals. 15 Deductible premiums are limited based on age. See IRS Publication 502 Medical and Dental Expenses for details. For more information, please contact your Hawthorn advisor. The PNC Financial Services Group, Inc. ( PNC ) uses the marketing name Hawthorn, PNC Family Wealth to provide investment, wealth management, and fiduciary services and the marketing name PNC Center for Financial Insight SM to provide wealth planning education to individual clients through its subsidiary, PNC Bank, National Association ( PNC Bank ), which is a Member FDIC, and to provide specific fiduciary and agency services through its subsidiary, PNC Delaware Trust Company or PNC Ohio Trust Company. Standalone custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds are also provided through PNC Bank. This report is furnished for the use of PNC and its clients and does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific investment objectives, financial situation, or particular needs of any specific person. Use of this report is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client s individual account circumstances. Persons reading this report should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. The information contained in this report was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained in this report and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information in this report nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Act ). Investment management and related products and services provided to a municipal entity or obligated person regarding proceeds of municipal securities (as such terms are defined in the Act) will be provided by PNC Capital Advisors. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC, the Federal Reserve Board, or any government agency. Securities involve investment risks, including possible loss of principal. Hawthorn, PNC Family Wealth is a registered service mark and PNC Center for Financial Insight is a service mark of The PNC Financial Services Group, Inc. 2018 The PNC Financial Services Group, Inc. All rights reserved.