How to play with the new standard deduction – and 3 other ways to lower your 2018 tax bill

With the end of the year fast approaching, the time has come to take steps to reduce your 2018 tax bill before it's too late. Here are four foolproof strategies at the end of the year to consider, taking into account the changes included in the Tax Reduction and Job Creation Act (TCJA).

1. Play increased lump sum deductions

The TCJA has almost doubled the standard deduction amounts. The standard deductions for 2018 are as follows:

* $ 12,000 if you are single or use the separate filing status for the marriage (instead of $ 6,350 for 2017).

* $ 24,000 if you are a spouse (over $ 12,700).

* 18,000 USD if you are head of household (instead of 9,350 USD).

If the total of your detailed deductions for 2018 will be close to your standard deduction amount, consider making enough additional expenses so that the detailed deduction items before the end of the year exceed your standard deduction. These advance payments will reduce this year's tax bill. Next year you will be able to claim the standard deduction, which will be slightly increased to account for inflation.

* The easiest deductible expense to pre-pay is included in the home payment due on January 1st. This accelerated payment will earn you 13 months of interest in 2018. Although the TCJA has set new limits on detailed deductions for residential mortgage interest, you are probably not affected.

* The prepayment menu then comes with state and municipal income taxes and property taxes that must be paid early next year. Prepaying these bills before the end of the year can reduce your federal tax bill for 2018 because the total of your itemized deductions will be much higher. However, the maximum amount you can deduct for local taxes and local taxes is reduced to $ 10,000 or $ 5,000 if you use different married filing status. So beware of this new limitation.

* Consider making larger charitable donations this year and smaller donations next year to make up for it. This could cause your itemized deductions to exceed your standard deduction this year. Next year you will be able to claim the standard deduction.

* Finally, consider speeding up optional medical procedures, dental work and vision care expenses. For 2018, you can deduct medical expenses to the extent that they exceed 7.5% of your adjusted gross income, assuming you detail them.

Warning: The local and national tax prepayment exercise can be a bad idea if you have to pay the dreaded alternative minimum tax (AMT) this year. This is because the rules of the AMT totally prohibit the write-offs of income taxes and national and local property taxes. Therefore, the prepayment of these expenses will bring you little or no tax savings if you are in AMT mode.

2. Carefully manage investment gains and losses in taxable accounts

If you hold investments in taxable brokerage accounts, consider the tax benefit of selling preferred securities that have been held for more than 12 months. The maximum federal tax rate on long-term capital gains seen in 2018 is only 15% for most people, although it can reach a maximum of 20% at higher income levels. The net investment income tax (NIIT) of 3.8% may also apply to higher income levels.

To the extent that you experience capital losses earlier this year or pre-2018 capital loss carryforwards, the sale of the winners this year will not result in any tax impact. Protecting net capital gains in the short term from capital losses is particularly beneficial, as short-term net capital gains would otherwise be taxed at higher regular income rates, up to 37%.

What if you have loser investments that you would like to unload? Biting the ball and bearing the resulting capital losses this year would protect capital gains, including the heavily taxed short-term gains, from other sales this year.

If the sale of a group of losers meant that your capital losses exceeded your capital gains, a net capital loss would result for the year. No problem. This net capital loss can be used to shelter up to $ 3,000 in revenue in 2018 from wages, bonuses, income from self-employment, interest income, royalties etc. ($ 1,500 if you use a separate marriage declaration status). Any excess capital loss in excess of this year is carried forward to the next year and beyond.

In fact, a capital loss carryforward could be a very good deal. Deferral can be used to protect both short-term gains and long-term gains seen next year and beyond. This can give you additional investment flexibility over these years because you do not have to hold appreciated securities for more than a year to get a preferential tax rate. And since the two main federal short-term net capital gains rates in 2019 and beyond are 35% and 37% (plus the NIIT of 3.8% if any), a loss carry-forward in capital to shelter short-term capital gains and heavily taxed is recorded in the coming years could be a very good thing.

3. Set up loved ones for them to apply the 0% tax rate on investment income

After the YTDC, the federal long-term capital gains tax rate and the eligible dividends on securities held in taxable brokerage accounts are always 0% when gains and dividends are within the range of 0% for LTCGs and dividends.

Although your income may be too high to benefit from the 0% rate, you may have children, grandchildren or other loved ones who will be in the 0% range. If this is the case, consider giving them appreciated shares or mutual fund shares that they can then sell and pay 0% tax on the resulting long-term gains. The winnings will be long-term as long as your ownership period, plus the period of ownership of the recipient of the gift (before the recipient sells), is equal to at least one year and one day.

Giving shares that pay dividends is another tax-smart idea. As long as the dividends fall within the 0% range of the recipient of the gift, they will be exempt from federal income tax.

To find out who can benefit from the 0% rate despite a respectable income, see here.

Warning: If you give securities to a person under the age of 24, the dreaded Kiddie tax rules could potentially result in the taxation of some of the resulting capital gains and dividends at the highest rates applicable to trusts and to successions. This would defeat the purpose. For more details on how the Kiddie Tax works, read this.

4. If you are inclined to charity: sell lost stock and give the resulting money; give winning actions

If you would like to give gifts to family members or favorite charities, you can do them together with a comprehensive overhaul of your equity portfolio and taxable mutual fund portfolios. Gifts must be made according to the following tax principles.

Gifts to parents. Do not give up the losers' shares (their current value is lower than the one you paid). Instead, you should sell the stock and account for the resulting tax loss. Then you can give the proceeds of the cash sale to your parent.

On the other hand, you should give winning actions to your family members. Most likely, they will pay lower tax rates than you would pay if you sold the same shares. As previously explained, relatives belonging to the 0% federal tax bracket for LTCGs and eligible dividends pay a 0% federal tax rate on gains from stock held for longer. from one year before being sold. (To comply with the more than one-year rule for the Offered Shares, you can count your ownership period plus the recipient's ownership period.) Even if the winning shares have been held for at least one year before being sold, Your parents will probably pay a much lower tax rate than theirs.

Donations to charities. The principles governing sensible tax giveaways to family members also apply to donations made to charities approved by the IRS.

You must sell the losers' shares and collect the resulting capital losses. Then you can give the proceeds of the cash sale to favored charities and claim the resulting savings deductions (assuming you detail them). By following this strategy, we get a double tax advantage: capital losses for tax savings plus savings deductions for charitable donations.

On the other hand, you should give winning shares instead of giving money. Why? Because donations of publicly traded shares you own for a year give rise to charitable deductions equal to the total current market value of the shares at the time of the gift (assuming you detail them). In addition, when you give winning shares, you are not subject to any capital gains tax on these shares. This idea saves twice as much money: you avoid the capital gains tax and you get a deduction for a savings gift (assuming you detail). Meanwhile, the tax-exempt charity can sell the donated shares without owing anything to the IRS.