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As you consider making any final year-end tax planning moves, review the major changes that are now in effect.

As you continue with your 2018 year-end tax planning, refresh your knowledge of the tax changes that are now in effect. Given the complexity, it’s smart to consult with your tax, financial and legal professionals to ensure you’re managing your wealth in the most tax-efficient way possible. Start the conversation with these topics and go from there.

Finding Your New Bracket

There are still seven brackets for 2018; the highest is now 37% instead of 39.6%. Where do you fall?

1. Income tax brackets have shifted. The act eliminates the so-called marriage penalty in all but the highest brackets and removes much of the disadvantage of the married-filing-separate status.

Positioning Portfolios

When it comes to your investments, you should know that:

2. Preferential rates for investment income remain unchanged. Continue to strategically position investments to take advantage of preferential tax treatment given to qualified dividends and long-term capital gains.
3. Ability to choose tax lots stays the same. Any time a security is purchased, the new position creates a distinct tax lot, even if you already own shares of the same security. When appreciated securities are sold or donated, capital gains or losses will be calculated based on the tax lot that you determine to be the most appropriate for cost-basis purposes.
4. Municipal bonds still have appeal. Although the reduction in the top marginal tax rate may diminish the appeal of municipal bonds for some, those seeking income may still find municipals to be a great source of tax-advantaged income and diversification. Because some individuals may no longer be able to fully deduct state and local income taxes, municipal bonds may appeal more to residents of states with higher income tax rates, such as California and New York. The attractiveness of local bonds could improve as high-income taxpayers in these high-tax states look to optimize their tax-equivalent yields on both a federal and state tax basis.

Maximizing Retirement Savings

Those of us saving for retirement should know that:

5. You may have more to contribute to retirement plans. Employees who participate in certain retirement plans can now contribute as much as $18,500, a $500 increase from 2017. Those over 50 can contribute an additional $6,000. If you end up paying less income tax, you could direct those savings toward your retirement, boosting pre-tax retirement savings and taking advantage of any employer match.
6. Roth IRA conversions could still be beneficial. Although re-characterization of a Roth IRA conversion is no longer permitted, this doesn’t mean you shouldn’t consider a Roth conversion when it makes sense (e.g., you anticipate a lower effective tax rate in retirement).

Bidding Adieu to the AMT (For Some)

The new tax law increased the exemptions ($109,400 married filing jointly and $70,300 single filer) and phase-out thresholds ($1 million married filing jointly and $500,000 single filer) which means many high-income earners once subject to the alternative minimum tax (AMT) no longer are.

7. Higher thresholds add flexibility for unexercised stock options. Corporate employees with vested and unexercised incentive stock options (ISO) may be able to exercise and hold larger amounts of these options, thus obtaining significant income tax savings by converting more ordinary income into long-term capital gains.
8. Recoup AMT credits. If you have AMT carryovers from 2017, you could find it easier to recoup them given higher exemption levels.

Recalculating the “Kiddie Tax”

The so-called kiddie tax was intended to prevent parents in high income tax brackets from shifting income to children in lower tax brackets. It generally applied to children under age 18 and full-time students under age 24. Previously, the net unearned income of a child was taxed at the higher of the parent’s or child’s tax rate. That’s not the case now, at least until 2026.

9. Kiddos taxed at lower trust rates. The new tax law simplifies how the tax is calculated, by no longer looking to the parent’s income and instead looking to the trust bracket. This effectively means the ordinary and capital gains rates of trusts and estates apply to the net unearned income of a child, while the child’s earned income is taxed using individual tax brackets. These revised kiddie tax rules are scheduled to revert back to 2017 levels in 2026.

Maximizing Your Gifts

The estate tax exemption has doubled to $11.18 million per individual and $22.36 million per married couple. The provision is set to expire for individuals whose death occurs after Dec. 31, 2025.

10. Give as much as you can while you can. The larger exemption affords an incredible opportunity to make substantial gifts and avoid federal and state death taxes on future appreciation of assets gifted during life. With this limited window of opportunity, you should consider using the higher exemptions before they are lost. On Jan. 1, 2026, the exemption will revert to $5.6 million – but the IRS has announced that individuals who take advantage of the increased exclusion amounts before then will not be adversely impacted when the limit drops to pre-2018 levels.

Asset allocation and diversification do not guarantee a profit nor protect against a loss. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Rolling from a traditional IRA into a Roth IRA may involve additional taxation. When converted to a Roth, the client pays federal income taxes on the converted amount, but no further taxes in the future. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Sources: Raymond James “Tax planning: Income and retirement” white paper; forbes.com, irs.gov