If you’re feeling frazzled about taxes, you wouldn’t be the first person to feel the pressure. Even Albert Einstein admitted, “The hardest thing in the world to understand is the income tax.” Add to that the myriad of changes in the tax code that took effect for 2018, and the hardest thing in the world just got harder. In response, we’ve compiled a list of year-end tax tips that could prove useful when the 2018 tax filing season begins on January 29th, 2019. After all, it’s your money. We’ll help you keep it.
1.) Do some number crunching. Tax reform has nearly doubled the standard deduction -$12,000 for single filers and $24,000 for married couples filing jointly. That means fewer people will choose to itemize. If you are, however, close to the standard deduction, bundling itemized deductions could help you surpass the standard deduction every other year. If your itemized deductions are under the threshold, you could choose to accelerate some payments or shift some deductions from next year to this year to benefit on your 2018 income tax returns. You could also opt to wait until January to make payments or donate to charity to take advantage of itemized deductions in 2019. In both scenarios, bundling itemized deductions should be approached as a “long-term” strategy. If you’re not sure what to do, a tax professional can be of assistance.
2.) Defer income. Income is taxed in the year it is received. If you are a business owner, consultant or freelancer, you could delay billings until late December to ensure payments in January. Yes, you will be taxed in 2019, but, if it would be helpful to reduce your bottom line this year, it might be worth the effort. Whether you are self-employed or employed, you can also defer income by taking capital gains next year instead of 2018. Got a year-end bonus coming? Some companies will issue bonus payments in January to help employees avoid a year-end tax hit. Check to see if that’s an option for you.
3.) Harvest a loss. If you anticipate a large net capital gain this year, you might want to sell off some stocks or mutual funds to generate losses before the end of 2018. Commonly referred to as “tax loss harvesting,” losses offset gains dollar for dollar. With that said, you should not let the lure of possible tax savings damage your overall investment strategy. Take a good hard look or consult with a financial expert to determine if taking a loss is beneficial or detrimental to your long-term financial plans.
4.) Don’t throw money away. If you have a flexible spending account (FSA) for tax-free spending on qualified medical expenses, this “use it or lose it” account requires the money be spent before a designated deadline, usually at year’s end or during a grace period if your employer’s plan provides one. Regardless, whatever funds are left in your account post-deadline are lost. Check on your expiration date and make plans to see healthcare providers before year’s end and to buy prescription medicine you will need in 2019.
5.) Contribute to your future. Shifting funds into pre-tax retirement plans such as a 401 (k), 403 (b), deductible IRA, SIMPLE IRA or SEP lowers your adjusted gross income and taxable income so you pay less tax. You could also see a reduction in the amount of Social Security subject to tax or any net investment income tax.
6.) Donate to charity. It is better to give than receive, especially if you itemize. Gifts of cash under the new tax law, are now deductible up to 60% of adjusted gross income (up from 50%), while gifts of stock remain deductible up to 30% of income. With the doubling of the standard deduction, many taxpayers who have previously itemized may choose the standard deduction. If that’s the case with you, but you’d still like to support causes near and dear to your heart, check out our previous blog for charitable giving strategies.
7.) Choose a charitable rollover. If you are over 70-½, consider a trustee-to-trustee transfer of a portion or all of your required minimum distributions to a qualified not-for-profit organization. By making a qualified charitable rollover, you can get a tax benefit even if you don’t itemize. That’s what we call a win-win!
At Tax Savings Professionals, we have helped thousands of clients save on their taxes over the past 18 years and would be happy to answer any questions you may have. Give us a call at (772)257-7888 or click on our contact form today. Here’s to a Prosperous New Year.