Most of us have been impacted by the 2018 Tax Law. You have probably already heard of the major provisions, such as lower rates overall and the reduced ability to deduct state and local taxes. If you are a business owner, particularly of a pass-through like an LLC, there are more significant changes that are quite relevant.

At AssetGrade, taxes play a critical role for most of our clients, so we work very closely with our clients and their CPAs to maximize their after-tax investing performance.

At 1,097 pages, the 2018 Tax Law is a large document - realistically, it will take a while for everyone to absorb and think through the implications. There are already some immediate implications emerging for 529 accounts and Roth IRAs that we will be addressing shortly.

We are dedicating this section of our website to keep all of the key information and investing ideas/implications we develop or come across from other people.


  • Starting Your 529

    The 2018 Tax Law differentiates 529 plans and prepaid tuition plans even further, by allowing up to $10,000/year in 529 plans to be used for K-12 school tuition. There are two big areas of caution. First, many state tax laws have not yet caught up with the new federal tax law, so you should check on your specific state tax laws before using the 529 for K-12 tuition. Second, the typical investments used in 529 plans, the “target date” funds, may no longer be appropriate for investors that are planning to use the 529 plans for K-12 tuition.

  • 529 Investments for K-12

    The 2018 Tax Law allows up to $10,000 in funds each year from 529 plans to fund K-12 education.

    The typical (most popular) investment options available in 529 plans for investing for college may not be appropriate because the time horizon for funding K-12 education expenses is shorter than funding for college expenses. A typical target date fund, a blend of equity and fixed income, may not be appropriate to fund a liability (like K-12 education expenses) that has a shorter time horizon.

    One approach to funding K-12 education expenses is a liability-driven investment (LDI) strategy. This is an investment strategy based on using cash flows to fund future liabilities. For example, if you know today that the average tuition per year of private high school in your area is $15,000 then you may consider investing a lump sum in certificate of deposits (CD’s) and laddering them so you can receive more yield (return on your investment) than a money market fund.

  • Roth IRAs

    Roth IRAs have long been one of our favorite types of investment accounts. Under the right circumstances, they can help investors lock in low income tax rates now, then avoid having to pay any taxes on future earnings.

    With the change in tax law, some people will be looking at much lower tax rates in 2018. There is a possibility that tax rates may increase in the future to deal with challenges in Social Security and Medicare. With the current situation of low rates today and potentially higher rates in the future, some people may be better off putting more money in their Roth IRAs now – it depends on the specifics of each family’s situation.

    In the past, the IRS used to allow recharacterizations. In other words, if you changed your mind after converting a traditional IRA into a Roth, you could undo it up until October 15th of the following year. That option to recharacterize has now disappeared with the 2018 Tax Law. That makes it all the more important to be sure you want to convert to a Roth before you start the process.

  • Charitable Giving with Assets

    The benefit of gifting an appreciated asset is we avoid recognizing a long-term capital gain and also received a tax deduction.

    Most of us have benefited from a strong stock market and may own a mutual fund or stock that has an unrealized gain. As a general rule, individuals do not pay tax on their investment until the gain is realized (the investment is sold in return for cash). If the investment is owned for less than a year, then the gain is taxed at a short-term capital gains rate. Subsequently, if the investment is held for more than one year, then the gain is taxed at a long-term capital gains rate. 

    The IRS encourages investors to hold their investments as long as possible and, as such, taxes long-term investments at a substantially reduced rate compared to short term investments. When a donor makes a gift of an appreciated asset to a charitable organization, the donor can avoid recognizing a long-term capital gain and also receive a tax deduction. Charitable organizations make donating appreciated assets relatively easy - there is minimal paperwork and the benefits to both the donor and organization are valuable.

  • Real Estate

    When selling your primary residence, make sure to get the big capital gains exemption on the sale ($250K for single people, $500K for married couples), particularly if you make a good profit compared to your cost basis. This exemption is applicable to those of us who have lived in their home for at least 2 of the prior 5 years. Also, don’t forget to track the major costs you have incurred to improve your home, as they increase your cost basis and decrease your gains from a tax perspective.


  • Pass-Through Income of $200K - $500K

    One of the biggest changes in the 2018 Tax Law is that pass-through businesses, such as S corporations and LLCs, now get a 20% deduction for income.  This deduction is available whether the standard deduction is taken or deductions are itemized.

    There is a big constraint that applies to service businesses.  Engineers and architects do not have a limit on their income, but other businesses that are based on reputation/skill face a limit.  This limit applied to health, law, consulting, athletics and yes, financial services.  The limit:

    • Single – taxable income threshold of $1K with phase-out of $2K
    • Married filing jointly – taxable income threshold of $3K with phase-out of $4K

    In effect, there is a large penalty that kicks in with income over the thresholds, since the 20% deduction disappears.

    In practice, this means that small business owners would not want to have income just over the thresholds, as that extra little bit of income can cost them thousands of dollars in extra taxes.

    Fortunately, small business owners can reduce their taxable income by large amounts by setting up retirement plans.  If you are an employee, you can contribute only $18.5K to a 401(k) in 2018, plus an additional $6K if you are age 50 or older.  However, if you are the business owner, you can contribute an extra $36.5K to the 401(k).  If you need to put even more aside, you can set up a defined benefit or cash balance plan and contribute an additional $150K+.  In total, you might be able to save $200K+/year in these retirement plans, which can help bring your taxable income below the threshold and help you receive the 20% deduction.  Susan describes how the process works below.

  • How to Bring Down Taxable Income by $200K+/Year

    Setting up a combined 401(k) and defined benefit/cash balance plan can be one of the most effective ways to bring down your taxable income by $200K+/year.  Setting up these retirement plans requires specialty expertise with an investment advisor, actuary and recordkeeper.  At AssetGrade, we have years of experience designing plans that allow for large tax-deductible contributions, well beyond the limits of a 401(k).  We make it easy for you by acting as quarterback for the entire process.

    According to the IRS, cash balance plans are the fastest growing type of retirement plan in the United States.  Changes in the tax laws are likely to accelerate their growth even more, as business owners seek to keep their pass-through income below the thresholds outlined above in order to get the 20% deduction.

    If you have a profitable small business, discretionary cash flow and are able to commit to the plan design for at least three to five years, a cash balance plan may be right for you.

  • Small Business - New IRS Clarification for QBI

    Looking for a great tax deduction? Proposed regulations from the Internal Revenue Service regarding the new 20 percent qualified business income (QBI) deduction were issued August 8th. They attempt to clarify the definition of QBI and “Specified Service” businesses, how phase out rules can reduce or eliminate QBI deductions and an anti-abuse rule designed to prevent separating out parts of otherwise disqualified business.

    Often referred to as a deduction for pass-through businesses, let’s be clear. These rules apply to owners of sole proprietorships, partnerships, trusts and S corporations allowing them to deduct 20 percent of their QBI.

    Those who earn less than $100 if single, or $300 for a married couple, can take full advantage of the 20% deduction. However, the new QBI rules phase out the deduction for high-income “Specified Service” businesses. These include lawyers, accountants, doctors, consultants, and financial advisors.  In these cases, the tax break fully phases out if they earn more than $207,500 if single, $415,000 if married filing jointly.

    S corporations exclude reasonable compensation to owners when calculating QBI. The same applies to guaranteed payments paid to partners. Taxpayers may claim the QBI deduction regardless of whether or not they itemize or claim the standard deduction.

    The rules regarding QBI can be quite complex and everyone’s situation is unique.  Please consult your tax professional to determine how you can best take advantage of the new proposed regulations.

Flash Tips

  • Reduce your taxes

    Make sure you understand how you were impacted by the 2018 Tax Reform Act. Review your 2018 tax return to understand how your itemized deductions have changed and how to optimize under the 2018 Tax Law. (there is a good chance you may no longer even itemize!). If you are a small business owner, see if you are eligible for the 20% QBI deduction. Make the most of tax-advantaged accounts like a 401(k) or IRA.

  • Utilize tax-efficient savings and withdrawal strategies

    Investing in a variety of accounts that have different tax characteristics is optimal. These can include traditional IRAs or 401(k)s, Roth IRAs and taxable brokerage accounts.

    In retirement, you’ll probably need to withdraw money from these accounts to supplement your Social Security income. By diversifying now while saving, you provide yourself with more flexibility.

    If you’re nearing or in retirement, review your options regarding social security claiming strategies and details of withdrawal strategies. “Conventional wisdom” may not optimize your cash flow.

  • Harvest Losses

    Given recent market volatility, you may have losses in your taxable accounts.  You can lock in those losses for tax purposes, while still being invested for the long-term by buying something similar, but not identical.  You can use these tax losses to offset capital gains when you file your tax returns.  This is a concept known as tax-loss harvesting.   For example, if you sold one investment and realized a gain of $5,000 and then sold another at a loss of $4,000, you reduce your taxable gain to $1,000.  If your loss is larger than the gain, you can deduct up to $3,000 of the net loss against ordinary income.

  • Bunch up itemized deductions

    The standard deduction increased dramatically with tax reform, from $13,000 to $24,000, so it may not be attractive any longer for you to itemize deductions. It might still make sense to itemize deductions if you make your January mortgage payment in December to get an extra month’s interest deduction and add up your medical expenses. For 2018, expenses in excess of 7.5% adjusted gross income are deductible. This is reduced from the 10% threshold in 2017. You obviously can't control when you get sick, but if you’re close to the 7.5% threshold "bunch up" procedures to maximize any deductibility.

  • Donate appreciated assets

    Assuming you’ve owned the asset for at least one year, you can get a two-for-one tax break. You avoid the capital gain from selling the investment and you can write off the current market value – not just your what you paid for it.

  • Open a retirement account for your small business

    If you have a plan in place by Dec. 31st, you have until the due date of your tax return, including extensions, to fund your plan while still taking a deduction for 2018.  If it’s just yourself or yourself and your spouse, consider a solo 401(k) or SEP IRA.   With new pass-through rules for small businesses, these plans allow for more flexibility to maximize deductions. 

    Routinely assessing where you stand can benefit you today and in the future. Don’t wait to get started, call us today. I know it can seem overwhelming, but I am here to help. Together we’ll create a plan for your Financial Fitness!