Wealth Planning

You filed your taxes. Now what?

By now, most people have seen their 2018 tax returns, their first under the Tax Cuts and Jobs Act of 2017. And what we’re hearing from our clients, no matter how they fared, is: “What can I do to soften next year’s tax blow?”


By now, most people have seen their 2018 tax returns, their first under the Tax Cuts and Jobs Act of 2017. And what we’re hearing from our clients, no matter how they fared, is: “What can I do to soften next year’s tax blow?” 

Here are some actions to consider.

Review and adjust quarterly estimated payments

Step one is to review and adjust your estimated taxes. To avoid penalties, you’ll want to comply with the IRS demand for payments that are the lesser of: (a) 110% of last year’s tax, or (b) 90% of the current year’s tax. 

If your income comes in uneven chunks (from sales of equities or a business, say) instead of a steady flow (from a salary, for example), paying estimated taxes based on the lesser of the two years can have huge advantages.

“You may actually want to owe money to the IRS on April 15,” says Jordan Sprechman, Wealth Advisory Practice Lead at J.P. Morgan Private Bank. Of course, you want to pay the minimum needed to avoid penalties, he explains. But once you’ve covered the minimum, you will have anywhere from 3.5 to 15.5 months to invest and earn money on any additional funds you will owe the following April 15. Stay aware, he reminds clients, that tax on the larger amount will come due eventually; so, clearly, that money should be invested conservatively.

Bunch your charitable gifts

Many people give a set amount to their favorite charities every year. But—if your income level varies significantly year to year—it now may make more sense for you to bunch really large gifts in years when you experience a big upswing in income. That way, you’d be able to clear the higher standard deduction hurdle, itemize and take a charitable deduction. Deductions for charitable giving are one of the few left intact by the new law. From 2018 through 2025, the standard deduction is $12,000 for a single filer and $24,000 for a married couple filing jointly (adjusted for inflation).

One of the best ways to make such a charitable gift is to a donor-advised fund (DAF). DAFs enable you to take a tax deduction in the year you make the gift.1 However, you do not have to identify and have the money go to your charitable recipients until later.2

Make your portfolio tax-efficient

Tax considerations should not drive investments, but—especially late in bull stock market cycles when a high return on equities is harder to find—tax-aware investments can save money. Everyone knows about options such as tax-free municipal bonds and tax-deferred investing through retirement accounts. There are also mutual funds that can automatically harvest tax losses to offset capital gains. But you also may want to look into new, sophisticated solutions to see if they suit your goals. For example, under the new law, investors can delay and possibly even eliminate taxes on capital gains by investing in the economically underprivileged areas known as Qualified Opportunity Zones.

Borrow effectively

Certain kinds of borrowing are tax-favored. Mortgage interest for new loans is tax deductible up to a limit of $750,000 for married taxpayers filing jointly. But interest on debt used for taxable investments is also deductible—without a loan limit.  If approached strategically and balanced correctly, this difference can save taxpayers thousands.

For example, Jonathan Oliver, a Boston-based Wealth Advisor at J.P. Morgan Private Bank, suggests you consider buying that new home outright instead of taking a mortgage. After closing, you might take a loan against the house and invest the funds. If you already planned on taking out a mortgage, you would be in the same position vis-à-vis leverage—but you may have a much more favorable tax situation.

Change your domicile

Because of the new caps on state property and income tax deductions, many people in high-tax states are thinking about moving to a lower-tax state. To get that benefit for 2019, however, you have to get going now.

“Changing domicile for tax purposes is not as a simple as buying a new home and hiring movers,” Thomas McGraw, Head of Tax Advisory at J.P. Morgan Private Bank, warns. “Often, a number of actions need to be taken to convince the taxing authorities in your previous state that you no longer owe them taxes.” For example, clients should move as soon as possible and keep a detailed calendar of days spent at their new residence. To help you with this effort, be sure to download our Changing Domicile Checklist

Special considerations

Business owners: The new tax law has such beneficial new rates and provisions for both C corporations and pass-through entities that many business owners are querying whether they should switch from the first to the second, or vice versa.  

So far, Oliver says, he’s seeing most small businesses decide to retain their pass-through status, because pass-throughs are simpler to set up and maintain; plus, the new tax law offers a 20% deduction for qualified business income.   

Your J.P. Morgan advisor can work with your tax specialists to help you determine which form of entity might suit your needs best. One big question to keep an eye on is whether you should make substantial purchases of tangible property, such as equipment or aircraft, for your trade or business. Under the new law, businesses may take this as a current deductible business expense in the year purchased, instead of recognizing the tax-deductible cost recovery through scheduled depreciation expenses over a number of years. 

Executives: The June deadline is fast approaching for you to elect to defer your bonus. Some of yesteryear’s best practices are still sound: Executives still should put as much money as they comfortably can into deferred compensation (subject to considerations of concentrated credit risk). These accounts allow your money to grow tax-free until retirement. Just keep in mind that you will need to pay taxes when you withdraw the funds; but by then your income tax rate will presumably be lower. We can help you evaluate how much is right for you to defer. 

To learn more about deferred compensation, click here.

Also, the near repeal of the AMT has created an opportunity to review your options exercise strategy. To learn how to identify which options may be best for you to exercise—and when, click here.

Principals of a hedge fund or a private equity firm: There are unique obstacles to receiving a full income tax charitable deduction for a donation that is a partnership interest in your company and/or in your funds. One of the best solutions, for many legal and practical reasons, is a donor-advised fund. However, you have to make sure that the charity sponsoring and administering the DAF accepts such assets (not all do), and that the assets are structured properly to assign to a charitable organization. To learn more, click here

We can help

Your J.P. Morgan advisor is available to work with you and your tax advisors to help make sure you make the most of the new tax law in line with your goals.

 

 

1Subject to AGI/basis limitations.

2Subject to the sponsoring organization’s requirements.

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