With the end of 2018 approaching, it’s time to start strategizing about how you’ll handle your federal tax bill, and it’s even more complicated this year because multiple changes to tax rules have gone into effect.
State and local tax deductions are now capped at $10,000, estate tax exemptions have doubled, home equity debt can no longer be deducted under some circumstances and tax brackets have changed. It’s a lot to keep track of, so consumers should consider getting an earlier start to avoid any hiccups or confusion next year when your return is due.
Check out these 10 best tax-planning tips to prep now – and save later.
1. Consider “bunching” deductions
The Tax Cuts and Jobs Act, which took effect for the 2018 tax year, increased the amount of the standard deduction from $6,500 to $12,000 for individuals, $9,550 to $18,000 for heads of households, and from $13,000 to $24,000 for married couples filing jointly. Those who don’t have enough deductions to exceed that threshold take the standard deduction instead.
However, Ken Moraif, CFP and senior advisor at Money Matters, recommends using the bunching method to surpass the thresholds, if possible. Bunching is a method where you time expenses by pushing deductible expenses into one calendar year. Moraif says this can be achieved by moving forward certain deductions this year, like charitable contributions or prepaying January’s mortgage payment.
“Doubling the charitable contributions in one year plus other itemized deductions may allow a person to be over the standard deduction and itemize every other year,” Moraif says.
Aside from charitable giving, consumers can accelerate tax deductions, such as an estimated state income tax bill, a property tax bill due early next year, or a doctor’s or hospital bill. These can also be beneficial when itemized under the “bunching” method.
2. Max out your retirement plan contributions
Lisa Greene-Lewis, CPA and tax expert at TurboTax, says maxing out your retirement plan reduces your taxable income, which will reduce your tax bill. In 2018, the maximum 401(k) contribution is $18,500, or $24,500 if you are age 50 or over.
Greene adds that those who can’t afford the maximum amounts should try to contribute at least the amount that will be matched by employer contributions. Think of the employer match as an immediate return on your money — all of the funds are tax-deferred and grow tax-free.
3. Take your Required Minimum Distributions (RMDs)
Individuals who are age 70 and a half or older with retirement accounts need to take the required minimum distributions by the end of this year. If not, they might face a heavy tax penalty of 50 percent of the required amount. This applies to both 401(k)s and IRAs.
“The whole idea behind an RMD is the IRS has allowed these investments to increase in value tax-deferred, so when they come out, they make sure that the IRS is getting the tax revenue it’s owed,” says Mike Moyer, CFP, senior wealth strategist at PNC Wealth Management.
RMDs are based on age and year-end values in eligible accounts. Moyer recommends account holders work with a professional to ensure they are taking the appropriate amount.
Additionally, Moyer says that combining RMDs with qualified charitable contributions can help lower your tax bill. By sending RMDs directly to a qualifying charity, your adjusted gross income won’t increase and you may be able to take a charitable tax deduction.
4. Engage in tax-loss harvesting
Under IRS rules, you have to pay taxes on any investment gain you realize in the year. Tax-loss harvesting is a strategy that involves selling poor performers in your portfolio to offset gains. Under current law, you can claim up to $3,000 in capital losses against non-investment income (or $1,500 if married and filing separately.) You can carry forward into future tax years any losses over $3,000.
Moyer explains that this may be a great strategy this year due to recent volatility in the market. However, under the wash-sale rule, you cannot buy “substantially identical” securities until at least 30 days later.
5. Take advantage of annual exclusion gifts
This year, the maximum amount of gift tax exemption increased from $14,000 to $15,000. This means you can give up to that amount to a family member without having to pay a gift tax.
Moyer says parents can best take advantage of this by gifting their children $15,000 into a trust or a 529 plan, which is a tax-sheltered plan for college expenses.
“Putting the $15,000 in a 529 plan can help keep 100 percent of the money,” Moyer says. He adds that the extra benefit is when students use the funds for school, it’s taken out tax-free.
6. Do some charitable giving
Charitable giving doesn’t only take form in cash contributions; you can also donate items to local charities and write their market values off as an itemized deduction on your taxes. Depending on the charity, you can donate things like gently used clothing, furniture, working electronics and more.
According to the IRS, charitable contributions to private organizations are limited to 30 percent of your adjusted gross income; public charity gifts are limited to 50 percent of AGI.
To get the 2018 tax break on your charitable gifts, they must be donated by the close of the tax year and you must have a receipt stating you donated them. Keep in mind the bunching method described above because unless you can exceed the new standard deduction thresholds, there’s no deduction for charitable contributions.
7. Get your health care coverage in order
Moraif warns consumers that although the Tax Cuts and Jobs Act of 2017 eliminated the individual penalty for not having health insurance, it doesn’t go into effect until 2020; the penalty for not being insured will continue to be enforced this year.
The penalty for not having insurance this year is $695 per adult or 2.5 percent of household income, whichever is greater. Sending in proof of insurance is not required, but Moraif says it’s an important piece of documentation to keep in your records.
8. Defer your income
Those who get a year-end bonus might want to consider waiting to take it until the following year, if their employer allows this. By delaying the income, you postpone additional taxes for 2018.
However, Greene warns that this strategy only makes sense if you think you will be in the same or a lower tax bracket next year.
“You don’t want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket,” Greene says. “If that’s likely, you may want to accelerate income into 2018 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.”
9. Update your beneficiary designations
While this doesn’t affect your taxes now, it could affect the taxes of your loved ones in the future. Moyer says year-end is a great time to review your beneficiaries and think about any big life changes that may make you want to consider updating your beneficiaries.
Why is it important? Down the road, it will help minimize any taxes your beneficiaries pay on your assets when you pass.
“If something unexpected happens to you, having your designations lined up and properly coordinated has a dramatic effect on the tax bills of who receives your assets,” Moyer says.
10. Protect yourself from fraud
Whenever you’re filing documents with sensitive information like your Social Security number, it’s imperative to take the necessary precautions to prevent your data from being compromised. Filing taxes should be done directly on the IRS website or that of a trusted tax preparer.
Additionally, be cautious about giving your personal information to a third-party platform. Setting up direct deposit with the IRS for your refund is wise, and if you owe money, be sure to send it through IRS Direct Pay.