Learn about these top seven year-end tax tips geared to maximize your tax refund or minimize the taxes due. If you decide to take advantage of any of these tips, ensure they are done before January 1, 2019.
1. Implement some last-minute tax deductions
You may want to lower your tax bill by accelerating deductions this year that you may have planned originally to make in 2019. For example, adding more charitable constrictions is a great way to get a increase your tax deductions.
You can magnify the tax savings of your contributions by donating stock or property rather than cash. Even better, as long as you've owned the stock or property for more than one year, you can deduct the property’s market value on the date of the gift and avoid paying capital gains tax on the accumulated appreciation in value.
Other expenses you can accelerate include:
- estimated state income tax payments
- a property tax bill due in 2019
- medical bills received in 2018
2. Defer your income to 2019
Income is typically taxed in the year the value is received. Employees may request their companies pay them their year-end bonus in the new year.
If you are self-employed or do work on an individual contract basis, you have flexibility on when you receive payment. Delaying billings until late December r the new year, for example, can ensure that you won't collect on those invoices until the new year.
Another way of deferring income can be had by taking capital gains by selling appreciated assets in 2019 instead of in 2018.
3. Sell unrealized losing investment to offset gains
One popular year-end strategy is often referred to as “loss harvesting”—selling losing unrealized investments such as stocks and mutual funds to realize losses. You can use these losses to offset any taxable realized gains you had during the year. Realized losses offset realized gains dollar for dollar. Also, you can use up to $3,000 of excess losses to offset other income, and the excess of the $3,000 in net realized losses can be carried over to following years.
4. Maximize Your Retirement Contributions.
Consider increasing your 401(k) contribution so that you are putting in the maximum amount of money allowed ($18,500 for 2018, $24,500 if you are age 50 or over). Also, consider contributing to an IRA. You have until April 15, 2019 to make IRA contributions for 2018, but the sooner you get your money into the account, the sooner it has the potential to start growing. Making deductible contributions also reduces your taxable income for 2018. You can contribute a maximum of $5,500 to an IRA for 2018, plus an extra $1,000 if you are 50 or older.
5. Avoid owing the kiddie tax
The kiddie tax stipulates that investment income for a child or most full time students under 24 will be taxed at a higher tax bracket than the child's normal tax bracket.
For 2018, the kiddie tax taxes a child's investment income above $2,100 at the same rates as trusts and estates which are usually higher than the individual rates.
6. Check IRA distribution amounts
When you make IRS withdrawals, consider asking your IRA custodian to withhold tax from the withdrawal. Withholding is voluntary but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments and increasing your risk of owing interest and penalties on underpaid estimated taxes.
7. Consider Rolling Over Traditional IRA to Roth IRA
Consider that your effective tax rates may be on the low side for your career due to the tax reform changes. You may roll over your traditional IRA into a Roth, tax-free IRA this year and pay taxes as if it is income. Of course, you would not want to roll so much over that you would be placed in a higher marginal tax bracket.
Note
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don't want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that's likely, you may want to accelerate income into 2018 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
We can help
Whether you are looking for end of year tax planning advice or other tax advisory services, Cloonan & Associates is well equipped to help you maximize your taxable deductions and minimize your tax burden. Visit our services page for more information about all of our professional services or send us a note on our contact form.