Prepare to spend more time for 2018 Tax Filing

The Tax Cuts and Job Act materially changed the income tax landscape and the 2018 filing season is the first application of new rules and forms. The current environment was complicated more by the recent government shutdown. The IRS began processing returns on January 28th. While refunds are expected to be issued accordingly, a strained IRS workforce may nevertheless result in delays. Tax preparers and self-preparation software may also need to ask new or additional questions of filers, in order to apply changes from the tax law. Your individual tax situation may actually become simplified due to the changes, but it is a good idea to anticipate needing more time this tax season to make that determination.

1099 Composite and Year-End Summary

Consolidated 1099 tax forms for brokerage accounts are expected be available online from Schwab by February 15. You should also receive a hard copy of all 1099s in the mail during February or early March. Corrected forms may be generated by mutual funds and could be produced several weeks after the original 1099; please watch for changes.

1099-R for Retirement Accounts

2018 1099-Rs for distributions from IRAs have been released by Schwab. If you were expecting a 1099-R for an IRA withdrawal or IRA to Roth conversion but did not receive one, please contact your advisory team at Heritage. If Federal or State income taxes were withheld from your IRA distribution the 1099-R will reflect those amounts. If you used an IRA distribution for a charitable donation, please see the important note below.

IRA Qualified Charitable Distributions (QCD)

If you were age 70.5 or over in 2018 and facilitated a distribution to charity from your IRA, please inform your tax preparer. Forms 1099-R for IRAs do not specifically indicate that a QCD was used for some or all of a required minimum distribution. A manual adjustment is required to denote the non-taxable QCD. Heritage will provide a separate notice if we facilitated a QCD for you.

K-1 for Partnerships

If your portfolio contains a partnership investment that produces a K-1 tax form instead of a 1099, you will generally receive an estimated K-1 by the end of March or early April, before the April filing and extension due date. Final K-1s are normally released in August or September, before the mid-October deadline for those on extension. You may wish to discuss with your tax preparer any administrative and fee differences between filing an extension vs. filing on time and then amending the return as needed.

Investment Management Fees and Related Expenses

Fees you paid for managing your investments are no longer deductible on Schedule A due to changes from the Tax Cuts and Jobs Act. Tax preparation fees are also no longer deductible.

Margin Borrowing Interest

Margin loan interest may be a deductible investment interest expense for those who itemize. There is a cap on deductibility equal to your net investment income, but any leftover expense can be carried over to future tax years. For Schwab, please reference margin interest on your December 2018 month-end account statement, located in the “Income Summary” section as “Interest Paid on Margin Loan-Year to Date.”

Home Equity Lines of Credit and Mortgages

The Tax Cuts and Jobs Act modified the available deduction for interest paid on home equity lines of credit (HELOC). Under the new law, interest paid on a HELOC for personal expenses such as paying off a credit card or buying a car is no longer deductible. However, interest paid for constructing or improving a home may still be deductible. You may need to provide context to your tax preparer in order to determine if any HELOC interest is fully or partially deductible. In addition, the law applied a reduction to the debt limit for the mortgage interest deduction, to $750,000 (down from the prior limit of $1 million) for new mortgages taken out after December 15th, 2017.

April Deadline for 2018 IRA Contributions

The deadline for making 2018 IRA contributions is Monday, April 15, 2019 for most taxpayers. Because of the Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to contribute. Even if you have an extension for filing your 2018 taxes, the deadline for a Traditional or Roth IRA contribution is not extended. You may not contribute to a Traditional IRA in the year you reach age 70.5 or any year after. You may continue to make Roth IRA contributions at any age, if you have earned income and are otherwise eligible.

IRS Form 8606 for Non-Deductible IRA Contributions

If you made a non-deductible IRA contribution for the 2018 tax year, please remind your tax preparer. Form 8606 needs to be updated and filed with your return to keep track of basis within IRAs, in order to eliminate double-taxation upon withdrawal. If you did not make a non-deductible IRA contribution for 2018 but have done so in the past, you should still file an 8606 with your 2018 return to maintain the cumulative basis records from prior years.

Spousal IRA Contributions

If you are married and file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did.

Catch-Up IRA Contributions

If you turned age 50 in 2018, it is the first tax year you can contribute an extra $1,000 to your IRA or Roth IRA, before April 2019, as a catch-up contribution. The limit for the 2018 tax year for those under 50 is $5,500; age 50 and older $6,500.

Roth IRA Contribution for Children

A Roth IRA offers tax free growth, making it a very attractive vehicle for young investors to take advantage of decades of compounding. If a child has earned income from a summer job or other work, a full or partial Roth contribution may be an option. Your child must have earned income, but he or she does not have to contribute the money to the Roth; you can fund the Roth IRA with your own money.

529 College Savings Plans

529 plan contributions are not deductible for Federal income taxes, but some states allow deductions or credits. Please inform your tax preparer of contributions you made to 529 plans. Depending on how much you contributed, you may also need to file a gift tax return.

Long-Term Care Expenses

Amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts may be included in deductible medical expenses. Please inform your tax preparer if this may apply or your expenses in this category changed in 2018.

Charitable Donations and Donor Advised Funds

Please make your tax preparer aware of any donations you made via the transfer of stock or mutual funds directly to a charity. Your 1099 summary from Schwab does not automatically provide this information. If you contributed to a Donor Advised Fund (DAF) at Schwab, a summary of your DAF account activity should be available by mid to late February.

Be Vigilant Against Scams

Tax season generally sees a marked increase in phone and email scams. Be suspicious of unexpected contact. Verify email addresses. Don’t click on links or attachments you aren’t familiar with. If you have changed your email, phone or mailing address, make sure your tax preparer and investment and banking relationships have all of your current contact information.

Be sure to consult your tax professional about your unique situation, to make sure you’re taking full advantage of what’s available to you under the law. And no matter the time of year, it’s a good idea to check with your tax adviser before you enter into any transaction that might have significant tax consequences.