Last call for tax planning

Chas Craig, BridgeTower Media Newswires

With the new year clearly in sight, taxpayers’ days are limited to impact their 2018 tax situations. Most recently we discussed strategies some taxpayers have found useful regarding charitable donations. Today we will cover a few more tax considerations. Again, everyone’s tax situation is unique, so nothing here should be viewed as tax advice, for which you should consult your tax professional or financial adviser.


Harvest capital losses

Nothing new here from the Tax Cuts and Jobs Act. Stocks with unrealized losses can be sold to offset already realized gains within a taxable account. Have unrealized losses for stocks within a given industry? Some investors will find it advantageous to sell those stocks, using the proceeds to buy an industry tracking fund. Once the 30-day wash sale period lapses, the fund can be sold and the individual stocks bought back. Additionally, after fully offsetting capital gains, up to $3,000 of capital losses can be used to reduce ordinary income, with any unused capital loss carried forward to future periods.


Concentrate medical expenses

Like 2017, the 2018 adjusted gross income threshold for deducting medical expenses is 7.5 percent, but this will increase to 10 percent in 2019. Therefore, if one is close to the 7.5 percent threshold in 2018 and can move a health outlay from 2019 to late 2018, it might behoove them to do so.


529 Plan expansion

Previously meant only to meet college expenses, families can now use 529 plans to pay for up to $10,000 of tuition each year per child for K-12 private school. In fact, those living in a state that allows a deduction (Oklahoma is one) for 529 plan contributions can deposit money in such a plan, realizing the state tax benefit, and then in very short order (10 days) withdraw the funds to pay tuition. Those who previously opened a 529 plan to squirrel away money for a child’s college now planning to use the account to save for private school should realize that the time horizon has materially shortened. Therefore, asset allocations that made sense with a decade plus time horizon might be too aggressive.


Avoid the 3.8 percent surtax

Most couples (individuals) with adjusted gross income of $250,000 ($200,000) or more will be subject to the 3.8 percent tax on net investment income such as interest, dividends, capital gains and royalties. Thus, an investor with a large unrealized gain in a stock he wishes to sell should determine if selling some before year-end and the rest in early 2019 could keep him under the referenced AGI thresholds in both periods.


Pease Amendment elimination

Under prior law, owing to a provision known as the Pease Amendment, allowable itemized deductions, subject to a few exemptions, were reduced by 3 percent of the amount by which an individual’s (couple’s) adjusted gross income exceeded $261,500 ($313,800). The elimination of the Pease Amendment is especially helpful for taxpayers who make large charitable donations during a year in which they have high income.


Consider business legal form

Most changes to the tax code are temporary (2018-2025) for individuals, but the reduction in the corporate tax rate to 21 percent is permanent (that is unless it gets changed later). The larger reduction in the corporate tax rate than for the effective top marginal individual rate for pass-through (partnerships, S corps, sole proprietorships) owners has made a few business owners consider converting their companies to C corps. Effecting such a conversion may make sense for a business going through a significant investment cycle, but I ultimately don’t expect a wave of conversions because the avoidance of double taxation is a powerful thing, even if a little less so under the new tax code.

Bottom line, the new tax code has given us all a lot to think about this holiday season and beyond.


Chas Craig is president of Meliora Capital in Tulsa (