With the Tax Cuts & Job Act (TCJA) signed into law late last year, now is the time to assess which strategies can be implemented to help you. Here’s a dozen strategies that can optimize your end-of-year planning.
- Review withholding. If you receive W-2 wages, review 2018 withholding and evaluate changes to your W-4. The TCJA brought new tax withholding tables. As such, determine now if current withholding will avoid underpayment penalties.
- Harvest stock losses. Review stock sales and harvest tax losses to offset capital gains. Losses can reduce taxable income by $3,000 for joint filers while capital losses have an unlimited offset for capital gains. Any unused capital losses can be carried forward indefinitely.
- Bunch itemized deductions. The standard deduction is now $12,000 per person. As such, far fewer people may benefit from itemizing deductions. However, bunch qualifying expenses if you plan to itemize deductions. In doing so, make more donations in years you itemize, and fewer ones in years when you take the standard deduction. Property taxes and state and local taxes are now limited for deductibility.
- Push or Pull Expenses. Some expenses can be pushed into the next year or pulled into this year. This is especially important if you plan on itemizing deductions. Expenses that can be pushed or pulled might be estimated property taxes due next year, estimate state income taxes due next year, mortgage interest, medical bills or charitable donations.
- Medical Expense Deductions. Medical expenses have a new, lower threshold, for deductibility if you itemize. As such, the new threshold was reduced from 10% of Adjusted Gross Income to 7.5% through the end of 2018. However, in 2019 the threshold returns to 10% of AGI.
- Property Tax Expenses. The TCJA capped the amount that can be itemized for property and state income taxes or sales taxes at a combined $10,000. Depending upon the value of your property, the sales tax deduction may be more valuable for Texas residents since we do not have an income tax.
- Revisit the Alternative Minimum Tax (AMT). The exemption increased this year and as such, you may be able to recapture some of the AMT paid in previous years.
- Fund retirement. Whether a 401(k), SEP or IRA, all offer the opportunity for a tax deduction on contributions, tax deferral on earnings and protection from creditors. Even if your employer does not offer a match, a 401(k) is still a very worthwhile opportunity. If you have a non-employed spouse, you can also fund an IRA on their behalf if you have the funds.
- Evaluate converting a Traditional IRA to a Roth IRA. Doing so causes the amount converted to be taxed in this year. However, once converted, the assets and earnings in the Roth are tax exempt. Since the lower tax brackets have been widened this year it pays to analyze how much can be converted before bumping into the next higher tax bracket. Additionally, a Roth IRA is not subject to age 70 ½ Required Minimum Distributions.
- Donate a Required Minimum Distribution. People who are age 70 ½ or older have Required Minimum Distributions from their 401(k) or IRAs. This required distribution is counted as fully taxable income unless you donate it to charity. A Qualified Charitable Distribution sends the RMD directly to a qualified charity of your choosing. However, the charity gets the full amount of the distribution and you pay no tax on the RMD. It’s a “win-win” proposition.
- Donate Appreciated Stock. Assume you have stock you have held for quite some time with significant appreciation. If you sell that stock to fund a charity, you must first pay taxes upon liquidation. However, if you donate the stock directly to your favorite non-profit, they get the full benefit of the donation and you avoid paying capital gains tax. Furthermore, you can still qualify for taking a charitable deduction on your tax return if you itemize. This is a superior way to benefit charity versus donating cash.
- The Kiddie Tax. For 2018 the kiddie tax assesses a child’s investment income above $2,100 at the same rates as trusts and estates—which is typically higher than individuals. If the child is a full-time student providing less than half their financial support, the tax usually applies until the child turns age 24.
Assessing and implementing these strategies offer legitimate opportunities to lower your 2018 taxes.
Let us know how we can help you in implementing these—or any other—strategies.
Sincerely,
