Just a reminder that the last day you may make a tax-deductible purchase, pay a tax-deductible expense, take advantage of tax credits, or make tax-deductible charitable contributions for 2018 is Dec. 31.
Every taxpayer’s situation is unique, and the suggestions offered here may not apply to you. The best way to ensure that you are putting yourself into the most tax-advantaged position is to seek tax-planning advice, usually earlier in the year. However, the following are some tax strategies that can be utilized at the last minute.
Maximize Education Tax Credits
If you qualify for either the American Opportunity or Lifetime Learning education credit, check to see how much you have already paid in qualified tuition and related expenses in 2018. If it is not the maximum allowed for computing the credits, you can prepay 2019 tuition as long as it is for an academic period beginning in the first three months of 2019. That will allow you to increase the credit for 2018.
Employer Health Flexible Spending Accounts
If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. As a reminder, you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs for which you don’t have a doctor’s prescription other than insulin, and the maximum contribution for 2018 is $2,500.
Maximize Health Savings Account Contributions
If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions, even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible, or nontaxable if made by your employer (within IRS-prescribed limits); earnings on the account are tax-deferred; and distributions are tax-free if made for qualifying medical expenses.
Conversions to Roth IRAs
If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.
Don’t Forget Your 2018 Minimum Required Distribution
If you have reached age 70 1/2, you must make required minimum distributions (RMDs) from your IRA, 401(k) plan, and other employer-sponsored retirement plans (but if you are still working, distributions from your current employer’s plan can be postponed until you retire). Failure to take a required withdrawal can result in a 50% penalty of the amount of the RMD not withdrawn. If you turned age 70 1/2 in 2018, you can delay the first required distribution to the first quarter of 2019, but if you do, you will have to take a double distribution in 2019. Carefully consider the tax impact of a double distribution in 2019 versus a distribution in both this year and next.
Advance Charitable Deductions
If you regularly tithe at a house of worship, you might consider pre-paying part or all of your 2019 tithing, thus advancing the deduction into 2018. This can be especially helpful to individuals who marginally itemize their deductions, possibly allowing them to itemize this year and then take the standard deduction for 2019.
Utilize IRA-to-Charity Transfers
You can combine your charitable contributions with your required minimum distribution. Once you reach age 70 1/2 and begin your required minimum distributions mentioned above, you can request that your IRA trustee directly transfer funds from your IRA to a charity. In doing so, the distribution is not taxable and goes toward satisfying your RMD requirements. This also reduces your AGI, which in some circumstances can reduce the amount of taxable Social Security income. There is no minimum charitable distribution, but the maximum amount per individual is $100,000 per year.
Maximize Tax-Deductible Medical Expenses
For example, if you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of the AGI floor for deducting medical expenses, or if adding the payments would put you over the 7.5% threshold and you are itemizing your deductions. You can even use a credit card to pay the expenses, but you would only want to do so if the interest expenses you’d incur if you don’t pay off the card right away would be less than the tax savings. You might also wish to consider scheduling and paying for medical expenses such as glasses and dental work before the end of 2018, since the medical floor is slated to increase to 10% of the AGI in 2019.
Don’t Waste the 2018 Annual Gift Tax Exemption
You can give $15,000 each to an unlimited number of individuals in 2018, but you can’t carry over unused exclusions from one year to the next. Taxpayers and their spouses can use their gift tax exemptions together to give up to $30,000 per beneficiary. For example, if you have four children and four grandchildren, you can remove $240,000 from your estate tax-free this year. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Take Steps to Avoid Underpayment Penalties
If you are going to owe taxes for 2018, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory rollover limit. Please consult this office to determine if you will be subject to underpayment penalties (there are exceptions) and, if so, the best strategy to avoid or minimize them.
Prepay State and Local Taxes for 2018
You probably know that if you are not subject to the AMT and you itemize your deductions, you are eligible to deduct both your property taxes and your state income tax. But did you know that you can increase the amount that you deduct on your 2018 taxes by prepaying some of 2018’s taxes? You can ask your employer to boost your state withholding by a reasonable amount or, if you are self-employed, pay your 4th-quarter estimate due in January in December and increase your deduction. The same is true for your real estate taxes: if you pay your first 2019 installment in 2018, you can take it as part of your 2018 deduction.
But be careful, as the tax reform complicated this strategy by limiting the state and local tax deduction to a maximum of $10,000, so any prepayment amount in excess of $10,000 would be wasted as a tax deduction.
Defer Capital Gains by Investing in an Opportunity Zone Fund
A unique benefit of the tax reform is the ability to defer a capital gain into a qualified opportunity fund (QOF). QOFs are funds that invest in areas in need of development. Starting with 2018, if you have a capital gain from selling property to or exchanging property with an unrelated party, you may elect to defer that gain by investing it into a QOF within 180 days of the sale or exchange. The gain won’t be recognized (i.e., you won’t be taxed on the gain) until your return for the earlier of the year of sale of the QOF or 2026. You can get up to 15% of the deferred gain forgiven entirely by holding the investment for required time periods, and you will pay no tax on any additional gain if the investment is held for 10 years.
Sell Loser Stocks
The stock market has been volatile over the last couple of months, and if you have stocks that have declined in value, you still have time to sell them before the end of the year and use any losses to offset other gains for the year or produce a deductible loss. The net capital loss deductible on a tax return is limited to $3,000 for the year, but any excess loss carries over to future years. You can repurchase stock in the same company for which you sold shares at a loss after 30 days have passed and avoid the wash sale rules.
Not Needing to File May Be an Opportunity
If your income and tax situation is such that you do not need to file for 2018, don’t overlook the opportunity to bring in some additional income, to the extent it will be tax-free. For instance if you have appreciated stock that you can sell without incurring any tax, consider selling it, or perhaps take a tax-free IRA distribution if you are 59 1/2 or older or otherwise qualify for an exception to the “early withdrawal” penalty.
Maximize IRA Distributions
If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawals with respect to your tax bracket. It may be tax-effective to actually withdraw more than the minimum required by law. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of this income.
Make Business Purchases
You can make last-minute business purchases such as for office equipment, tools, machinery, and vehicles and write them off using the 100% bonus depreciation or Sec. 179 expensing, provided you actually place the item(s) into business service by the end of the year. However, you must consider the impact that expensing the items will have on your taxable income and the new Sec. 199A 20% pass-through deduction. It may be appropriate to contact this office in advance of any last-minute business acquisition.
There are additional factors to consider for a number of the strategies suggested above, and you are encouraged to contact this office prior to acting on any of this advice to ensure that your specific tax circumstances will benefit.
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