Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is applicable to Net Investment Income (NII) when a taxpayer’s Modified Adjusted Gross Income (MAGI) is greater than $250,000 for those who are married and filing joint returns, $125,000 for those married and filing separately, and $200,000 for those filing as single or head of household. As the end of the year nears, you can avoid this surtax by reducing your MAGI so you will not exceed the threshold or by delaying receipt of NII. MAGI can also be reduced by increasing pension deferrals or IRA contributions.
The 0.9% additional Medicare tax also applies to higher income earners. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 for all others. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. Those who are close to the threshold may want to consider delaying the exercise of employer stock options, which would increase their taxable wages enough to exceed the threshold.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple). Timing can be important here as it’s possible to plan your long-term capital gains to maximize yet not exceed the lowest possible long-term rate bracket. It might be possible to defer other income or increase business deductions in order to reduce income, thereby making more of your long-term gains subject to the lowest rate possible, or even a zero rate.
If you are age 70-½ or older by the end of 2018, have traditional IRAs, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. The amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings, particularly if you can’t itemize your deductions.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
If you were in an area affected by Hurricane Florence, Hurricane Michael or any other federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them on either the return for the year the loss occurred (in this instance, the 2018 return normally filed next year), or the return for the prior year (2017).
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