In spite of the sweeping changes voted into law by the Tax Cuts and Jobs Act (TCJA) late last year, there are still year-end strategies one can follow to make the most of these new rules to minimize one’s tax burden for 2018. Here are some suggestions:
Avoid Purchasing Mutual Funds Right Now – Most mutual funds pay out capital gains earned all year before year-end. This tends to adjust the market value downward by the amount paid out, and is usually done in December. If you purchase a mutual fund now, and they make a capital gain distribution in December, you will be taxed on that distribution and see your investment value drop to adjust for that distribution. Wait until January to make these purchases!
“Harvest” Tax Losses – If you hold non-retirement account investments that are currently worth less than their cost and sell them before year-end, you can use those losses to offset gains realized on other investments or deduct up to $3,000 of net capital losses for the year. (Note: be careful not to buy back the security for 30 days, or the loss may not be deductible).
Bunch Itemized Deductions- The new standard deduction limits are much higher in 2018, reducing the incentive to itemize deductions, many of which were eliminated anyway (e.g. state and local taxes over $10,000, tax preparation & investment fees, moving expenses, casualty & theft losses, etc.). However, you may be able to “bunch” those remaining deductible expenses (e.g. medical expenses, state & local taxes under $10,000, charitable gifts, etc.) into a single year and benefit from itemizing this year while taking the standard deduction next year. Otherwise, you may fall short of itemizing deductions in both years, which essentially “wastes” them.
Make IRA Contributions- If you aren’t participating in an employer-sponsored retirement plan, you have the flexibility to fund an IRA until the tax filing date of April 17th, 2019. Be sure to label the contribution for 2018 – especially if you are making it in 2019.
Contribute to an HSA – If you are using an eligible High Deductible Health Plan, you can contribute to a Health Savings Account and receive a tax deduction. Contribution limits are $3,450 for a single person and $6,900 for a family (add $1,000 if over Age 55). Funds withdrawn for qualifying health expenses are tax-free. If you’ve accumulated medical expenses for 2018, you can contribute to an HSA now and then reimburse yourself for those expenses.
Remember Charitable Gifts - Giving charitably may be the easiest way to “bunch” itemized deductions. You can pull future year charitable giving to the current year by contributing to a donor-advised fund, which gives you the deduction now, while enabling you to actually distribute from the account to your favorite charities over time: both now and in the future.
Consider a “Backdoor” Roth IRA – This advanced tax planning strategy is sometimes used by taxpayers with income too high to make a direct Roth contribution. In this case, they make a non-deductible IRA contribution which is immediately converted to a Roth IRA (e.g. “going in the back door”). Unlike contributions, Roth conversions are not subject to income limits.The converted amount is generally subject to income taxation.
Year-end tax planning is an opportunity to take advantage of strategies that could save you tax dollars now – or later on. While some of these strategies may sound simple, they may not be simple to implement on your own. Consider working closely with your financial planner or tax advisor to avoid making a planning mistake. You’ll be glad you did!
This material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific issues with a qualified tax advisor.