The Internal Revenue Service (IRS) has been advising taxpayers to consider a tax withholding check-up to make sure there are no surprises come tax time. Significant changes, especially those to itemized deductions, could affect your tax bill. While tax planning is best done at the beginning of the year, if you haven’t made any adjustments, don’t despair: there are still options available at year-end to help you save come tax time.
Here are ten year-end moves that could help you save on taxes in 2018.
1. Give To Charity. Charitable donations are an easy way to reduce your taxable income if you itemize your deductions. In order to claim a charitable deduction on your tax return, you must itemize your deductions on a Schedule A. Since some itemized deductions have been eliminated in 2018 – and the standard deduction doubled – there may be less of a tax incentive for charitable donations in the new year (there are still non-tax reasons to give). If you’re looking the biggest bang for your buck, consider bundling charitable gifts. So, for example, instead of donating $1,000 annually for each of five years, consider giving $5,000 all at once. It’s the same total gift as before, but if you coordinate it with your other deductions, you can take advantage of the deduction now. For more on charitable giving, click here.
2. Schedule Last-Minute Medical Procedures. The good news is that, if you itemize, medical expenses remain deductible. Not only did they survive the cut but Congress moved the floor back to 7.5% for 2017 and 2018. What that means is that if you itemize your deductions, you can deduct medical and dental expenses which exceed 7.5% of your adjusted gross income (AGI). Here’s how that works. Let’s say your AGI is $40,000 and your medical expenses are $5,000. Assuming you itemize, you can claim $2,000 as a deduction, or $5,000 in expenses less the floor (7.5% x $40,000 = $3,000).
Medical expenses include such items as prescriptions, doctor’s visits, and health insurance premiums, as well as other expenses like that dental procedure or operation you’ve been putting off. Surgeries and procedures don’t have to be for a life-threatening condition to be considered medically necessary; they might include anything from cataract removal to a root canal. Surgeries and expenses related to treatment in foreign countries may also be deductible, not that I’m necessarily recommending it. And no, it doesn’t have to be as dramatic as all that since medical expenses include the more mundane procedures, too, like year-end checkups, dental or eye exams, and routine blood work. In terms of timing, the deduction is available in the tax year in which the bill was paid, not when services were rendered – so even if you can’t get in to see the doctor just yet, you might be able to pay upfront and still claim the deduction.
But make those appointments now: On January 1, 2019, the floor moves back to 10%. That means that next year, you can only deduct medical and dental expenses which exceed 10% of your AGI. So if you’ve been putting off a visit to the doctor, now’s the best time to schedule.
3. Top Up 529 Plans. You can’t claim a federal income tax deduction for making a contribution to a 529 plan but beginning in 2018, 529 plans were expanded to allow you to use distributions from the plan to cover more expenses. You already knew that you could use funds for college, but now, you can use up to $10,000 of 529 savings plans per student for public, private and religious elementary and secondary schools. If the idea of paying for elementary school and college scares you more than a little, consider putting away money now to use in a few years. And if your bank balance is already on the low side from all of that holiday spending, relax. You don’t have to write a huge check today, but you can schedule regular payroll or bank transfers of just a few dollars moving forward.
4. Contribute to an IRA. Socking money away in an IRA is a great way to save on taxes. When you contribute to a traditional IRA with after tax-money, the contribution is typically deductible on your tax return. In addition, the money grows tax-deferred until it is withdrawn at retirement. (With a Roth IRA, contributions are still typically made with after-tax money, but you don’t have the advantage of a tax deduction because withdrawals at retirement are generally tax-free.)
You can contribute to an IRA through Tax Day 2019 – and still get the benefit of the deduction in 2018 – but why wait? The sooner you get started, the better. And don’t be intimidated by the numbers. Most taxpayers can contribute up to $5,500 in 2018 (and $6,000 in 2019), but you don’t have to fund at the max amounts if you don’t have those sorts of resources available. Some brokerage services, like Etrade, allow you to open an account online with little to no minimum balance.
5. Make estimated payments. If you are filing as an individual taxpayer, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your federal income tax return. Estimated tax payments are sometimes called quarterlies since to make the payments, you figure your estimated tax (you can use the worksheet on the federal form 1040-ES) for the year and divide the amount into four payment periods, about once every quarter. It’s true that you should have been paying quarterly (the last quarterly payment for 2018 is due January 15, 2019) but if you haven’t, better late than never. Penalties are time-based, meaning they are imposed on each underpayment for the number of days the tax remains unpaid. If you miss a payment, all is not lost: simply file and pay as soon as you can.
6. Get rid of the losers. While there might be a few ways to interpret this advice, I’m focusing on investments. If you own stocks or other investments (like cryptocurrency) that lost value in 2018, consider dumping them to offset realized gains. Selling stocks or other investments that are losers to offset gains from winners is called harvesting. Be careful: if you look at your financial statements and see that you’ve “lost” money, make sure that it’s a real loss. Even if your accounts tumbled hundreds or thousands of dollars, it means nothing to Uncle Sam unless you realized a taxable event (a sale of stock or another event that triggers a tax consequence). If that’s the case – and you have realized losses – you may want to offset those losses with gains and vice versa. Keep in mind that there may be other, non-tax reasons for selling winning or losing stocks or other assets, but if you’re doing it as a tax strategy, make sure that you’re buying or selling when it makes good tax sense.
7. Chat with a pro. I know, I know: Following tax reform, expenses related to tax preparation and other legal and tax advice are no longer deductible for individual taxpayers. However, if you’re a regular reader, you know that I’m a big proponent of finding a good tax pro and that holds true even if you can’t claim the deduction. Tax isn’t just a numbers and forms game: there’s a lot of nuance that can get lost, costing you time and money. Using an experienced tax preparer may actually save you money at tax time – even without the deduction. Ditto when it comes to consulting with an attorney about restructuring your business, alternative benefits or compensation arrangements or other tax planning.
8. Buy more stuff. I know, it seems antithetical that to save money, you would spend money. But if you’ve been putting off spending money on your business because you didn’t want to be out of pocket and have to deduct those expenses over time, you’re in luck. Beginning in 2018, businesses may immediately expense the cost of section 179 property – up to $1 million. Tax reform changes to bonus depreciation also make the purchase of vehicles and used equipment much more favorable than before. The rules are supposed to be more simple (ahem) but some of the specifics are tricky. If you have questions, check with your tax pro before spending your cash.
9. Go into business for yourself. I don’t advise taxpayers to make life decisions based solely on taxes (see my next tip below). However, sometimes the universe and taxes collide to give you a push when you need it. Under tax reform, deductions for unreimbursed employee expenses – including the home office deduction – have been eliminated. Other deductions, like the medical expense deduction, may not be as attractive. However, those deductions are still typically available for self-employed persons filing a Schedule C as well as other businesses entities, like corporations. If the loss of unreimbursed job expenses will hit you in the wallet and if you’ve been thinking about taking the plunge into owning your own business, now may be the time.
10. Move. Under tax reform, deductions for state and local sales, income, and property taxes normally deducted on a Schedule A are capped at $10,000 ($5,000 for married taxpayers filing separately). If you live in a state with high income or property tax rates, the cap may limit your ability to deduct both in 2018. A move across the border – or even further afield – may save you thousands of dollars. While this isn’t a strategy that you should consider on a whim to avoid paying taxes, if you were already considering picking up and moving, now may be a good time.
I often caution clients not to let the tax tail wag the dog, meaning that you shouldn’t make a big decision based solely on the tax consequences. You should, however, consider how you can take advantage of tax breaks which might be available and how the timing of related decisions might impact your tax bill.