With the Tax Cuts and Job Act (TCJA) signed into law late last year, now is the time to assess strategies to help you. Here are a dozen strategies that can optimize end-of-year planning.
1) 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 if current withholding will avoid underpayment penalties.
2) 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. Unused capital losses can be carried forward indefinitely.
3) Bunch itemized deductions. The individual standard deduction is now $12,000. As such, fewer people may benefit from itemizing deductions. However, bunch qualifying expenses if planning to itemize. Make more donations in years you itemize and fewer in years you take the standard deduction. Property taxes and state and local taxes are now limited for deductibility.
4) Push or pull expenses. Some expenses can be pushed into the next year or pulled into this year. This is important if you itemize deductions. Expenses that can be pushed or pulled might be estimated property taxes due next year, estimated state income taxes due next year, mortgage interest, medical bills or charitable donations.
5) Medical expense deductions. Medical expenses have a new, lower threshold for deductibility if you itemize. The new threshold dropped from 10 percent of Adjusted Gross Income to 7.5 percent for 2018. However, in 2019, the threshold returns to 10 percent of AGI.
6) 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 on the value of your property, the sales tax deduction may be more valuable for Texas residents since we do not have an income tax.
7) Revisit the alternative minimum tax. The exemption increased this year, and as such, you may recapture some of the AMT paid in previous years.
8) Fund retirement. Whether a 401(k), SEP or IRA, all offer opportunities for a tax deduction on contributions, tax deferral on earnings and creditor protection. Even without an employer 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.
9) 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.
10) Donate a required minimum distribution. People 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.
11) Donate appreciated stock. Assume you’ve held stock 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 nonprofit, 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.
12) 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.
Evaluating these strategies now offers legitimate opportunities to lower your 2018 taxes. However, time is running out for 2018, so act quickly.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.