Hope everyone enjoyed the Christmas holiday, and plans on having a fun New Year’s. I’ve tried to relax as much as possible with the onslaught of the oncoming tax season, just a few weeks away, which promises to be one of the most interesting seasons, possibly the most interesting, tax season ever. I know that “interesting” is not a word that usually comes to mind about taxes for people who are not tax professionals but the Tax Cuts and Jobs Act that was passed at the end of 2017 has radically changed the individual and business tax codes more than ever before, and with 2018 being the first year it was in effect, my next tax preparation season promises to be both busy and interesting.
Before you uncork that champagne, there are a few last-minute moves you can make that could reduce your 2018 tax liability, although not all of them may apply to your situation.
1. Max out your 401k/403b plans. Whether you itemize deductions or not, you have the option to exclude up to $ 18,500 from your taxable income ($ 24,500 if you are 50 or older) in your workplace’s 401k or 403b plans. Money put into these plans is excluded from federal (and usually state) taxation and grows tax-deferred until you begin withdrawing in your retirement years.
2. Max out your Individual Retirement Account (IRA) or Self-Employed Individual Retirement Account (SEP-IRA). Depending on your income level and whether you have access to a 401k plan at your job, you may also be able to contribute up to $ 5500 to a traditional or Roth IRA ($ 6500 if you are 50 or older), or up to $ 55,000 in a SEP-IRA if you are self-employed. Funds contributed to traditional IRAs and SEP-IRAs reduce your taxable income and put away money that grows tax deferred for retirement. You can actually make these contributions after December 31, 2018; contributions to all kinds of IRAs for 2018 can be made up until the April 15, 2019 filing deadline.
3. Charitable Donations. If your total itemized deductions (generally state & local taxes up to $ 10,000, mortgage interest and charity) add up to an amount greater than the standard deduction ($ 12,000 for individuals, $ 18,000 for single parents, $ 24,000 for married couples, higher amounts for persons over age 65), making donations of cash, collectibles or investments to charity can reduce your taxable income. When you donate a collectible or investment that has increased in value since you purchased it, you may deduct the fair market value of it, giving you the benefit of a deduction that was more than you paid for the collectible or investment and avoid paying any capital gains tax on the increased value. Be sure to get a receipt for every donation! The IRS will want to see receipts in the event you are audited.
4. Paying Ahead on Your College or Graduate School Courses. If you haven’t made a payment toward your next semester’s bursar bill (whether it is for you or a student in your family), making an advance payment can result in you receiving up to a $ 2000 Lifetime Learning Credit or a $ 2500 American Opportunity Tax Credit depending on your income level.
5. Student Loan Interest. If you have any student loans in repayment, you likely have already made your monthly payment for December. Some added interest has accrued between then and now; making an extra payment could result in an extra deduction, up to $ 2500 depending on your income level and regardless of whether you itemize your deductions or not.
6. Selling off Losing Investments to Offset Capital Gains. As a tax professional, I cannot offer any investment advice whatsoever (and neither this nor any other part of this blog should be construed as such), but if you own an investment that has lost considerable value, and don’t see it coming back anytime soon, now would be the time to sell it. Any loss that is generated gets deducted against any investment gains you have realized during 2018, and up to $ 3000 can be deducted against your other income. If there is still an investment loss left over after both of these deductions, the loss is carried forward to the next tax year. This potential tax savings applies whether you itemize your deductions or not.
7. 529 College Savings Plan Contributions. Some states (not all) give you a deduction on their returns for funds contributed to your childrens’ college savings plans. You have until December 31 to make a contribution to the college savings plans that can be deducted on your state returns (if the states allow such a deduction). The amount you can contribute is unlimited, although all states that allow you to deduct these contributions have a limit on the amount you can deduct, and contributing over $ 15,000 per child in a year could result in you having to pay the federal gift tax.
8. Medical Expenses and Medical Debt. It is extremely rare for my clients to be able to deduct un-reimbursed medical expenses, as only the portion that exceeds 7.5% of your income can be deducted as an itemized deduction (and is irrelevant if you do not itemize). But if you have any outstanding medical bills or need to pick up and pay for a drug prescription, and the total amounts exceed 7.5% of your income, you may receive an additional deduction to reduce your taxable income if you pay these off before December 31. This applies only to those who itemize their deductions and if the expenses are not high enough, it will not make a difference.
As always, do not make any of these moves without consulting your tax professional as they may not end up being beneficial in your situation. As always, I’m an easy phone call or email away. Enjoy your New Year’s Eve and see you in 2019!