While unrelated to tax law, once again Tesla has been the hype across the media given recent SEC action and the company's legal woes. Regardless of which side you may reside on (for or against Tesla), it seems the roller coaster ride could continue for some time.
Our recent blog post in August focused on very important IRS tax law guidance (that was overshadowed by the initial Tesla news that spurred these recent SEC legal issues). As we enter the final quarter of 2018, its important tax payers focus and pay close attention to these recent tax law changes that may have a significant impact on them.
As you may recall, the enactment of the American Taxpayer Relief Act of 2012 (ATRA), shifted the income tax code from two dimensional to a multi-dimensional system. The Tax Cuts and Jobs Act of 2017 (TCJA) rolled back some of these complications, nevertheless, long gone are the days when individuals, tax preparers, and wealth advisors only had to consider the regular income tax brackets. What does this mean for the everyone going forward? It means that virtually every financial decision now needs to be analyzed through the lens of multi-dimensional tax system.
Here is a short summary of questions and considerations to ask yourself that may help uncover financial and tax planning opportunities as we approach the end of 2018 and beyond:
WHAT IS THE SOURCE OF YOUR INCOME?
Understand sources of income: wages, self-employment, partnership, etc. and your entire income situation.
Review controllable and non controllable items of income (for example, wages, stock options, etc.) for use in income tax projection planning.
A Sample Tax Rate Evaluation
ARE THERE ANY INCOME DEFERRAL OPPORTUNITIES AVAILABLE GIVEN YOUR INCOME SOURCE?
Evaluate benefits of saving through a qualified plan for your business or self-employment income.
Are maximum 401(k) contributions being made given new annual IRS limits?
Determine benefits of 83(b) elections.
Evaluate benefits of exercising stock options in one year or another via tax projections.
Complete a thorough retirement planning cash flow analyses to determine if current deferral will suffice.
DO YOU HAVE DISTRIBUTIONS FROM MULTIPLE IRAs?
Consider consolidating multiple accounts but be mindful of the IRA rules.
The IRS allows just one rollover from an IRA per year.
WHAT ARE THE SOURCES OF YOUR INTEREST INCOME?
If taxable, does it come from bonds, CDs, savings accounts, etc.?
Understand your state impact if tax-exempt.
Consider the FDIC limits if the source is savings accounts.
If the source is municipal bonds, consider the safety of the bond.
WHAT ARE THE SOURCES OF YOUR DIVIDEND INCOME?
Understand the types of stocks or funds generating the dividend income.
Is it mostly from mutual funds or stocks?
Are there better alternatives to these investments your currently have?
HOW ARE YOUR ASSETS CUSTODIED AND TITLED?
Does the titling line up with your desires?
Evaluate the various ownership options and impact of each.
DO YOU HAVE SCHEDULE C INCOME?
Determine whether your business generates qualified business income (QBI) as defined under IRC Section 199A to be able to potentially take advantage of the 20% pass-through business deduction.
Consider the phase-out limitations ($415,000 MFJ and $207,500 for other filing statuses).
Are there changes in the business structure that could allow you to receive a larger deduction?
DO YOU HAVE CAPITAL GAINS AND LOSSES REPORTED ON YOUR SCHEDULE D?
Do you have loss carry forwards? Consider year-end rebalancing in taxable accounts where these can offset gains.
If there is substantial trading activity, you should evaluate the overall strategy and ensure you are aware of fees associated with such activity.
If you are in a 0% capital gains tax bracket, consider realizing gains to use up that tax bracket.
DO YOU HAVE ANY RETIREMENT PLAN DISTRIBUTIONS?
Consider net unrealized appreciation (NUA) election from the 401(k) if you have substantial employer stock.
Which retirement accounts you should be taking distributions form to ensure highest tax efficiency?
Determine if Roth IRA conversions make sense for you; depending on time horizon, the strategy may be for you.
Keep in mind AGI thresholds and run proper cash flow analyses to minimize tax impact.
Sample Net Investment Income Tax Analysis
Some Strategies for Reducing NIIT: Roth IRA Conversions; Charitable Remainder Trusts; Charitable Lead Trusts; Oil & Gas Investments; Installment Sales; Grouping Business Activities to Create Material Participation; Choice of Filing Status.
IS THERE INCOME FLOWING THROUGH FROM AN LLC, S CORPORATION, OR PARTNERSHIP TO SCHEDULE E?
Consider whether the activities are passive or active for purposes of deducting losses.
What is the impact of additional invest income tax of 3.8% on passive activities?
Consider whether income from LLCs should be considered self-employment income.
Discuss the impact of Section 199A 20% pass-through deduction under TCJA.
Do you have rental real estate properties being reported on Schedule E?
Depending on your situation, you may need to also focus on other new tax law changes. In the months ahead, we will continue to dive into more topics to help you understand where tax planning opportunities may exist for you.
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Source: IRS; AICPA; Bloomberg. M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. There are many different interpretations of investment statistics and many different ideas about how to best use them. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.