New York City residents have always been hit hard by the high personal income tax rates, which can go as high as a combined State and City rate of almost 12.7%. The pain moderated to some degree by the federal itemized deduction for state and local taxes no longer provides any relief since the deductions cap under federal tax reform.

Clients have been looking for a way out. Some are willing to go as far as leaving their formerly beloved NYC for good. When I heard some grumbling about the New York City tax rate dropping, I was excited for taxpayers, but surprised that this was the first I heard of it.

Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?

The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.

What’s Changed?

The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.

Sometimes estates that are large enough for estate taxes to be a concern are asset rich but cash poor, without the liquidity needed to pay those taxes. An intrafamily loan is one option. While a life insurance policy can be used to cover taxes and other estate expenses, a benefit of using an intrafamily loan is that, if it’s properly structured, the estate can deduct the full amount of interest upfront. Doing so reduces the estate’s size and, thus, its estate tax liability.

Deducting the Interest

An estate can deduct interest if it’s a permitted expense under local probate law, actually and necessarily incurred in the administration of the estate, ascertainable with reasonable certainty, and will be paid. Under probate law in most jurisdictions, interest is a permitted expense. And, generally, interest on a loan used to avoid a forced sale or liquidation is considered “actually and necessarily incurred.”

Just a few years after William Shakespeare’s death[1], the English Parliament passed the Petition of Right, a major step forward in the history of taxation in that it prevented the Crown from creating new taxes without Parliament’s approval. Had Bill lived just a few more years, he would have witnessed the King’s discretion severely limited. While this limit on discretion was certainly helpful as it related to new and arbitrary taxes, discretionary authority certainly has a place in modern day state taxation, especially when it relates to allocation and apportionment of income.

I’ve blogged many times about and as a Firm have issued more formal publications regarding the current thinking in state apportionment formulas. I’ve explained the traditional three factor method of property, payroll and receipts as compared to the trend towards a single receipts factor. We have discussed the evolution away from a manufacturing to a service economy and as a result the total revamping of sourcing rules as they relate to the performance of services. The technical details and variations are the subject of many an article and treatise.

Will you be age 50 or older on December 31 and still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past because of changes under the Tax Cuts and Jobs Act (TCJA).

Catching Up

Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.

Estate planning typically focuses on what happens to your children and your assets when you die. But it’s equally important to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself. A crucial component of this plan is the power of attorney (POA) — specifically, a nonspringing POA.

POA Defined

A POA is a document under which you, as “principal,” authorize a representative to be your “agent” or “attorney-in-fact” to act on your behalf. Typically, separate POAs are executed for health care and property.

A POA for health care authorizes your agent — often, a spouse, child, or other family member — to make medical decisions on your behalf or consent to or discontinue medical treatment when you’re unable to do so.

The Boomtown Rats second number one single, “I Don’t Like Mondays” released in 1979, obviously has absolutely nothing to do with Cyber Monday, first recognized in 2005. It also has nothing to do with that nagging feeling some of you have after an extended Thanksgiving weekend.

So while my team and I are eager to go this Monday morning, why you ask, don’t we like Cyber Mondays?

The answer lies in the sales and use tax and the payment and collection obligations associated with the two. We started explaining years ago that there are no federal laws banning sales tax related to internet purchases. (In particular, see my January 1, 2013 article, “Marketplace Fairness Act May Help Clear Muddy Tax Waters.”) Many articles and blog posts since have delved into the various legislative proposals since. In addition, as avid Berdon Blog and Evisor readers know, the word is the world has turned upside-down since the Supreme Court decision in Wayfair. (See the June 22, 2018 Client Alert, “Most Impactful State and Local Tax Ruling in More Than 25 Years . . .”)

An IRA is a popular vehicle to save for retirement, and it can also be a powerful estate planning tool. Some people designate a trust as beneficiary of their IRAs, but is that a good idea? The answer: possibly.

IRA Benefits

The benefit of an IRA is that your contributions can grow and compound on a tax-deferred basis for many years. The longer you leave the funds in the IRA, the greater the potential growth, because taxes aren’t taking a bite out of the account. If you don’t need to tap your IRA funds during your life — other than required minimum distributions (RMDs) — you can stretch out its benefits even longer by designating your spouse or child as beneficiary.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid Surprise Capital Gains

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

The timing could not have been any better. New Jersey’s latest holiday gift presents itself as the long anticipated start date for the latest in tax amnesty.