There’s still time left in the year to make some last-minute tax moves. If you are in a higher tax bracket this year or find more income in your paychecks due to lower tax reform rates, you may consider applying some of these strategies to your situation.
1. Give to a Good Cause
Donating to charity is an effective and generous last-minute strategy to lower your tax bill. There are a couple strategies to consider if you take this route.
Due to the charitable contribution limit increase from 50 percent to 60 percent of AGI, you may consider bunching or establishing a donor-advised fund to combine multiple years worth of contributions into one larger deduction. This will allow you to claim the deduction in the funding year, then schedule the funds to be dispersed over two or more years.
Additionally, you have the option of donating appreciated stock or property. This option can reap double the tax benefits if you’ve owned the asset for over a year. On the date of the gift, you can deduct the property’s market value and avoid paying capital gains tax on the built-up appreciation.
2. Maximize Your Retirement Contributions
One of the most beneficial investments you can make is to max out your retirement contributions each year. The maximum amount for a 401(k) is $18,500 for 2018, $24,500 if you are age 50 or older. Your funds grow tax-deferred until you decide to withdrawal at retirement.
You may also consider contributing to an IRA, where you have until April 15, 2019 to invest the maximum amount of $5,500 for 2018, plus an extra $1,000 if you are 50 or older.
3. Defer Income
If you foresee staying in the same or lower tax bracket in 2019 as you are in this year, deferring income is an option to consider. Delaying billings and/or bonuses, etc. are a couple strategies to defer income into next tax year.
4. Sell Off Under-Performing Investments
Investments, such as stocks and mutual funds or even cryptocurrency, that lost value in 2018 can be sold off to realize losses and offset any taxable gains in 2018—dollar for dollar. This year-end strategy is called “loss harvesting” and can be used to offset losses if they are more than realized gains. Up to $3,000 of excess loss can be used to clear out other income, but if there’s more than $3,000 in excess loss, a taxpayer can carry it over into next year.
5. Start or Top Off Funds in a 529 Plan
Your 529 plan savings are no longer limited to higher education with the passing of the tax reform. The reform expanded the definition of how the funds could be allocated and now apply to up to $10,000 per student for public, private and religious elementary and secondary schools. While taxpayers cannot claim a deduction for a 529 plan contribution, this recent change allows taxpayers more freedom to use savings in other areas of education.
6. Pay for College Courses Ahead of Time
If you are continuing your education or putting a child through college, you can choose to pay first-quarter 2019 college courses before December 31.
A Lifetime Learner credit of $2,000 may be available for those continuing education. And college students may be able to get the American Opportunity Tax Credit for up to $2,500 during the first four years of college.
7. Check Your Flexible Spending Account
This “use it or lose it” savings account is a fringe benefit offered by many employers to help employees save for medical or childcare expenses. A flexible spending account averts both income and Social Security taxes. Employees decide at the beginning of the year how much to contribute and then must use the funds over the course of the year or lose them.
With the end of the year in sight, employees should check their account and either use available funds at the pharmacy, doctors appointments or on last-minute medical procedures; or the employee should inquire with their employer about the IRS-approved grace period through March 15, 2019. This grace period is approved under the direction of individual employers.
If you are considering last-minute tax strategies in 2018, please contact me at firstname.lastname@example.org or (805) 963-7811.