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.
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.
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.
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
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.
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.
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.
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
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, this strategy only makes sense if you think you will be in the same or a lower tax bracket next year.
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.
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.