15 year-end tax planning tips to help you close out 2018

December 11, 2018

Before year-end, there are a few key things to consider for your individual tax plan.

Double check projected income and taxes paid year-to-date:With the elimination of many itemized deductions, some people could owe more, not less, this year. An extra estimated tax payment might be needed, especially in higher-tax states. Going forward, wage and salary earners in this situation might want to increase withholdings.

Consider “bunching” deductions to get over the standard deduction amount and be able to further reduce taxes: Some ways to do this include:

• Spending on qualified medical expenses. In 2018, the medical expense deduction is allowed for expenses that exceed 7.5 percent of adjusted gross income. The expense deduction goes back to the prior AGI threshold of 10 percent in 2019 for those younger than 65 years of age.
• Pre-pay the January mortgage payment in December to increase the mortgage interest deduction.
• Make charitable contributions (see following).
• Small-business owners should look at tax deductible expenses they are considering for early 2019 – should any be accelerated into 2018 for a greater deduction this year?

Give to charity for charitable deduction:

• Charitable deductions are allowed up to 60 percent of AGI in 2018; an increase from 50 percent.
• Donation of RMD directly to charity (for those older than 70.5) reduces AGI by the amount donated. These Qualified Charitable Contributions are capped at $100,000 per year (further donations will be itemized deductions).

For those with higher taxes, use tax loss harvesting to offset capital gains: Recent volatility in the market might have moved some securities into negative territory. If there are no appropriate gains to offset, or if the offset has been used, up to $3,000 in losses can be deducted against ordinary income on federal taxes. The rest can be carried over to future years.

• A key part of the full strategy (if used) is to sell the “loser” and invest in a portfolio-appropriate but not “substantially identical” security to avoid the wash-sale rules.
• The tax loss is locked in, and the investor does not miss out on market upswings by staying invested.

Conversely for those in lower tax brackets: Consider selling stocks that have appreciated in value up to the amount that would generate low-to-no capital gains tax.

If you invest on your own: Consider whether large mutual fund purchases prior to year-end make sense due to the potential capital gains and dividend income you could be receiving from the fund’s year-end distributions. If you work with a financial adviser, ask which investments are appropriate given your 2018 tax situation.

Finishing a divorce in 2018 will allow spousal maintenance payments to be taxable to the recipient spouse and deducted by the payor spouse: For divorces finalized and maintenance agreements altered in 2019 and beyond, there will be no deduction for the payor spouse and the recipient spouse will not report the payments as income.

For those with credit shelter trusts (also called bypass or family trusts) with the option of distributing income to beneficiaries:Distributing trust income to beneficiaries who may be in a lower tax bracket could reduce taxes for the family.

• Trusts are taxed at the highest tax bracket so distributions to family members in lower brackets may lower overall taxes for the family. The trust claims a Distributable Net Income deduction to avoid double taxation.
• Be wary of the new kiddie tax laws in which minor children and full-time students younger than 24 are taxed at trust tax rates on all unearned income.

Confirm RMDs: Be sure they have taken from IRA and inherited IRA and Roth IRA accounts for 2018.

If cash is needed for retirees in the next few months: Consider which year would be better tax-wise to sell assets to generate cash.

Increase 401(k) or IRA contributions: This can maximize pre-tax deductions and tax-deferred growth.

Make Roth IRA contributions or non-deductible IRA contributions with conversion to Roth IRA account: This helps accumulate tax-free investments.

If you are an eligible participant in a high-deductible health insurance policy: Contribute more to Health Savings Accounts. Money contributed is pre-tax, grows tax-deferred and is tax-free when used for qualified medical expenses in the future. These accounts can be invested to potentially further increase tax-free accumulation.

Make contributions to 529 plans: If significant year-end bonuses are paid, consider contributing $15,000 per 529 plan beneficiary in 2018, and then again in January for 2019. It will give the money longer to grow by contributing for 2019 early in the year. Also, up to $10,000 each year from a 529 plan can be used to pay for K-12 private school tuition. There might be state tax incentives for these contributions.

Remember to use up any remaining flexible spending account balance: These are “use it or lose it” accounts, so it is important to stay on top of it. Many providers offer discounts this time of year to help people use up FSA money.

This is only general information about the subject matter covered. It is not being provided to render legal, accounting or tax advice and may not be used to avoid penalties under the Internal Revenue Code. Consult with appropriate advisors on all matters pertaining to legal, accounting or tax obligations and requirements.

This article was previously published in the Tri-State Business Times.