It’s the most wonderful time of the year – tax planning time. The Tax Cut and Jobs Act (TCJA) means many people will see lower tax bills this year, but that doesn’t mean you should pass on tax planning. Below, we look at moves you can make to pay less taxes.
Max Out Your Retirement Account
Who would you rather pay, yourself or the government? I’m willing to gamble that you chose yourself. If you did, then one of the easiest moves you can make is to contribute to a Traditional or Roth IRA. For 2018, taxpayers may be able to contribute up to $5,500 to an IRA or Roth IRA, with those 50 and older eligible to add another $1,000 to this amount.
Strategically Batch Your Itemized Deductions
The TCJA increased the standard deduction, almost doubling it to $12,000 for those filing single and $24,000 for those filing married. Remember that you only get to itemize your deductions if they exceed your standard deduction. As a result, many taxpayers who itemized last year will take the increased standard deduction instead this year. For those who still itemize, they can strategically batch their deductions – especially if they are near or below the threshold.
Batching you itemizable deductions simply means postponing or accelerating deductions into one tax year or the next. This way you can get more than the standard deduction one year and take the standard deduction the next year, instead of always being limited to the standard deduction or just over it. There are three itemizable deductions that have the most potential for batching: property taxes, mortgage payments and charitable deductions.
Depending on local deadlines, taxpayers can make three property tax payments in one year and one the next (instead of two every year) by playing with the timing. You pull a similar tactic with your mortgage payment by paying early one year and squeezing in 13 payments one year and then 11 in the next. For charitable deductions, consider how much you plan to donate and move are much as possible into one year and less the next. If you do this across all three items, you can substantially move the deductions to your advantage.
Qualified Charitable Distributions
Even if you don’t plan to itemize, you can still use the qualified charitable distribution strategy to save taxes. Generally, after reaching 70 ½ years of age, taxpayers are required to take Required Minimum Distributions (RMD) from their retirement accounts (Roth IRAs are an exception while the owner is still alive). If you’re subject to RMDs, you can have the distributions sent directly for the retirement account to a nonprofit.
The advantage here is if you use the RMD to replace what charitable donations you would otherwise make. By having the money sent directly from the account, you’ll never realize the distributions as taxable income, but you will still receive an itemized deduction for the full amount.
Aside from tax planning, the year end is a great time to rethink your overall investment portfolio and strategy. As you do this, you might find it a good time to sell some of the short-term (less than one year) losers in your portfolio, allowing you to deduct up to $3,000 of short-term losses against regular income after other capital gains are offset. Anything over a net $3,000 loss you can’t take and must be carried forward to future years.
Make sure you use tax-harvesting strategies when you take your losses. Don’t buy back the same security you just sold within 30 days or the loss will be disallowed. Instead, you can consider purchasing a similar, but not identical fund, ETF or index fund; hold it for 30 days or more, and then either keep it or sell it and repurchase your old holding.
The holidays are a busy time full of friends, family and gatherings, but make sure you take at least a little time to see if you can apply some of these tax-saving strategies. If you’re in doubt or just want to take a detailed look at your individual situation, reach out to us to help with your year-end tax planning.