We have compiled the following actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. Be aware that many of the strategies described below can work in conjunction with one another to be more effective, and they require taxpayers to be proactive in planning. The sooner variables are considered the better the results will be. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.
Tax deferred investing is a good choice because it allows your money to grow tax-free until you make a withdrawal at retirement age. Additionally, when you take withdrawals during retirement your income will generally be lower than it was when you were working. This allows you to take advantage of lower tax brackets.
Consider maximizing your 401(k), 403(b), 457, and TSP contributions. Many employer plans also provide matching funds from the employer. These plans should be maximized to not only take advantage of the tax deferral, but also the employer matching. If you meet the requirements, you should also consider maximizing IRA contributions which are $5,500 or $6,500 if you are 50 or older. Also note that IRA contributions can be made up until the due date of your return, which is generally April 15th of the following year. This allows taxpayers to make a contribution during one year and designate it for either the current or previous year depending on which year would provide the most tax benefit.
Why pay tax now when you could pay later? What if it is actually cheaper to accelerate income into the current year? How is that ever a good idea? The answer is… “That depends”.
Generally, you want to accelerate deductions and defer income. The theory being that money is more valuable today than in the future, but that assumes that the marginal tax rate is identical in future years. There are opportunities for taxpayers to accelerate or defer both items of income and deductions. Potential items of income that a taxpayer can control to a degree include bonuses, consulting income or self-employment income. On the deduction side, taxpayers can control the timing of payments for state and local income taxes, interest payments, real estate taxes and charitable contributions. It is worthwhile to note that bills paid with a credit card are deductible in the year they are charged to the credit card even though you may not pay the credit card bill until after the end of the tax year.
How does one determine if it is best to increase or decrease income in any given year? One key variable is the marginal tax bracket, which is the rate of tax applied to the next dollar of income earned. If these earnings are down in the current year then it may be wise to accelerate income / defer deductions to consume the standard deduction, personal / dependency exemptions, and low tax brackets. If income is blindly deferred instead and all indications point to a better year coming up the taxes on this income will be higher. This is because the marginal rate of tax on that income will be higher due anticipated increase in earnings.
Capital gains and losses present excellent opportunities for deferral because you have nearly complete control over when you sell them, but be careful when harvesting losses. You generally cannot use capital losses against other kinds of income, and if you buy the same security within 30 days before or after you sell it, you cannot use the loss under the wash sale rules.
Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented in order to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a written acknowledgment from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into the current year if you won't be subject to the alternative minimum tax (AMT) next year. Don’t forget that under the TCJA tax reform there is a $10,000 overall cap set for combined state and local income tax, sales tax, property tax, and personal property tax deductions. If your current year payments already equal or exceed $10,000 then no further benefit can be obtained by making additional payments.
Don’t forget that certain kinds of taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI. If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by re-characterizing the conversion that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
Consider the effect of any year-end planning moves on the AMT, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT,or suspect you might be, these types of deductions should not be accelerated.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where the income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. These are just some of the year-end steps that can be taken to save taxes. Remember these strategies are based on general assumptions and may not apply to everyone. If you believe any of these strategies could apply to you, please contact us at Rikard & Neal so we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks to assure that you don't miss out on any resuscitated tax-saving opportunities.