The Tax Cuts and Jobs Act ushered in meaningful changes to the tax code, upending some tried and true strategies. But not everything has changed. Here are the five most important tax planning questions you should ask as 2018 draws to a close.
1. Have you taken full advantage of all tax-deferred savings vehicles?
In many cases, maximizing tax-deferred savings can make or break your long-term investment success. How much can you contribute? The table below offers a guide:
Married couples filing jointly might consider an oft-overlooked option. A working spouse can make a full contribution to an IRA on behalf of a non-working spouse under 70½. The entire contribution remains deductible, provided neither the IRA owner nor the spouse actively participates in an employer-sponsored retirement plan. Otherwise, the tax deductibility of the contribution phases out at higher income levels. Business owners seeking a larger tax deduction can also explore higher contribution limits for SEP IRAs, defined contribution plans, and defined benefit plans.
2. Have you taken your Required Minimum Distributions?
Our research shows that investors should generally preserve funds inside retirement plans for as long as possible. However, some investors have no choice: IRA owners over age 70½ and beneficiaries of inherited IRAs must take Required Minimum Distributions (RMDs) by December 31 each year. The lone exception is the first required distribution, which must be taken by April 15 of the following year. Those missing the annual deadline face severe penalties: a 50% excise tax on any shortfall in the distribution.
3. Are you planning to make any charitable donations?
Donors can help themselves—while helping others—by making charitable contributions in the most tax-efficient way possible. In most cases, that means donating appreciated securities, rather than writing a check. That way, donors receive a charitable deduction for the value of the securities while avoiding tax on the appreciation. The catch? Avoid contributing appreciated stock held less than one year, because the deduction for a short-term security is equal to its cost basis, not its current value.
Under the new tax law, the landscape for charitable giving has shifted dramatically. Many taxpayers who previously itemized their deductions will now find it advantageous to use the standard deduction. The latter has almost doubled to $12,000 for single filers and $24,000 for married taxpayers filing jointly, plus $1,600 (single) or $2,600 (joint) if over age 65.
Many familiar tax deductions have also been limited or suspended. For instance, the deduction for state and local taxes (including property and state income taxes) has been capped at $10,000. That means some former itemizers who elect the standard deduction may now lose all or part of the income tax benefit of making charitable gifts.
Fortunately, investors still have options. For instance, by bunching multiple gifts into a single year, a donor can increase the tax benefit of their charitable gifts. Donors who wish to bunch but don’t want the charity to receive the gifts all at once—or those with unusually high income or gains in 2018—could fund a donor-advised fund (DAF).
Another attractive option for donors taking the standard deduction? Individuals over age 70½ can donate up to $100,000 from their IRA. The gift must come directly to a charity, rather than to a DAF or private foundation, and will qualify as part of the donor’s RMD. Plus, the distribution is excluded from gross income—providing the equivalent of a 100% deduction.
4. Have you realized any gains?
Despite the lower returns of 2018, equity markets have surged since 2009 and many investors hold positions with large gains. Mutual funds are required to distribute realized capital gains and income as dividends, which creates a taxable event for fund shareholders. Some of these can be offset by harvesting losses. A net loss of up to $3,000 can also be used to offset ordinary income.
5. Have you considered transferring assets to family members?
For those with surplus wealth, the current annual gift tax exclusion rests at $15,000 per person ($30,000 per couple). In addition, the gift and estate tax exclusion—as well as the GST exemption— currently stand at $11.18 million per person. However, on January 1, 2026, the lifetime gift exemption, the GST exemption, and the federal estate exclusion are all slated to revert to $5 million per person, adjusted for inflation.
Many of the hurdle rates for wealth transfer vehicles remain low by historical standards. Since its establishment in the late 1980s, the 7520 rate has averaged approximately 5.1%. Yet today, the December rate hovers at only 3.6%. What’s more, the rate used to calculate intra-family loans and sales for terms greater than nine years remains highly attractive.
In the current environment, leveraged strategies like loans, installment sales, or GRATs seem preferable to outright gifts. Plus, a loan or installment sale gives the grantor the option to forgive the debt and complete the gift if it appears that Congress may reduce the exclusion amount in the future.
The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.