Year-End Tax Advice

As 2018 comes to an end, so does the window of opportunity to take advantage of certain tax and financial planning strategies. To help you be best positioned come Tax Day 2019, I share the following 2018 year-end tax and financial planning tips. 

1. Bunch Charitable Contributions
Deadline: December 31, 2018
Quote: “For those individuals who are considering the standard deduction instead of itemizing, consider bunching your charitable contributions into alternate years if it will enable you to take the standard deduction one year and itemize the next. If you do not want to give the money to charity at one time, contribute to a donor advised fund and then make the distributions to charity over time.” 

2. Give Appreciated Stock to Charity
Deadline: Stock received by December 31, 2018
Quote: “This is a good time to rebalance your portfolio and capture some of the stock market gains of the last few years.  Consider donating some appreciated stock to charity.  This has the double benefit of a charitable deduction for the full market value of publicly traded stock (without recognizing the gain) and a partial rebalancing of your portfolio if you are over-weighted in stocks.” 

3. Donate Required Minimum Distribution to Charity
Deadline: Distribution made by December 31, 2018
Quote: “Taxpayers age 70 ½ or older who need to withdraw their required minimum distribution (RMD) for the year should consider leveraging a Qualified Charitable Distribution (QCD).  The taxpayer may direct the distribution of up to $100,000 each year from their employer sponsored retirement plan or IRA to one or more qualified charitable organizations.  This distribution counts toward satisfying their RMD and will not be taxable to the individual.  This is a smart way to gain an effective deduction for charitable gifts without the need to have itemized deductions in excess of the newly increased standard deduction.” 

4. Use-It – Don’t Lose-It
Deadline: Check with your plan provider 
Quote: “As we approach the end of 2018, it is important for taxpayers to focus on the use-it or-lose-it type planning opportunities. For example, taxpayers should strive to maximize contributions to their available retirement plans, keeping in mind the additional contributions that may be made if age 50 or older. Taxpayers should also take the time to review their flexible spending accounts (FSAs) and plan how to use the funds before year-end. Any funds not used by the end of the year or account deadline will be lost.” 

5. Gift to Heirs Today to Reduce Future Estate Tax
Deadline: December 31, 2018
Quote: “The year-end is a great time to make annual exclusion gifts. For those looking to reduce their estate tax exposure, individuals can give up to $15,000 to an unlimited number of beneficiaries per year without decreasing their lifetime estate tax exclusion amount or paying a gift tax. These planning opportunities will be lost once the year ends and should be top of mind to review now.” 

6. Check in On Your Financial House
Deadline: Make it routine.
Quote: “The end of the year is an opportune time to ensure that your financial house is in good working order and on track with your life and financial goals. Good financial housekeeping involves ensuring your emergency fund is sufficient, reviewing outstanding debt and thinking through whether it makes sense to pay some down, as well as reviewing insurance policies and confirming the coverage is adequate. Also, revisit estate planning documents to confirm they are still in line with your wishes.” 

7. Maximize Employer 401(K) Match Opportunities
Deadline: Deferred from last paycheck or December 31, 2018
Quote: “Make sure you’ve taken advantage of your employer’s match to your 401(k) plan. Better yet, make sure you’ve maxed out how much you can contribute. Leaving this benefit underutilized is the same as leaving money on the table.” 

8. If Your Tax Bracket Is Low, Here’s Where Your Retirement Money Should Go
Deadline: April 15, 2019
Quote: “For anyone who is early on in their career or in a lower tax bracket, consider Roth 401(k) contributions to build tax free assets. If you are able, be sure to contribute the maximum amount for the year in order to take full advantage of this year’s opportunity to put away retirement savings dollars for tax free growth.” 

9. Make Your 529 Plan Contributions Now
Deadline: Check with your state. 
Quote: “Remember that if your state allows a deduction for a contribution to a 529 plan, generally a contribution must be made in 2018 to get the deduction on the 2018 state tax return. This is unlike IRAs and HSAs that allow until the April 15 tax deadline.” 

10. Check Your Withholdings 
Deadline: Make it routine.
Quote: “Check your withholding and update your W-4 if needed.  If additional withholding is needed before year-end, you can use Line 6 of the W-4 to state the amount of additional withholding.  Remember to submit another updated W-4 if you wish to remove that extra withholding in the future.” 

11. Leverage Your Losses 
Deadline: December 31, 2018
Quote: “Harvest your losses! It’s been a strong year for US equities, but international stocks and fixed income have had negative returns for the most part.  Therefore, take advantage of tax loss harvesting to offset any of the gains you’ve taken throughout the year.  Bear in mind, though, that you can’t buy back the same holding you sold at a loss within 30 days or else you’ll run afoul of ‘wash sale’ rules.” 

12. Financial Planning Tips for Small Business
Deadline: December 31, 2018
Quote: “Businesses should review equipment needs to determine if it makes sense to make the purchase and place the item(s) in service before December 31, 2018. Many businesses can write off 100 percent of equipment purchases with either bonus depreciation or Section 179 expensing.

A little calculating now can help you avoid tax surprise in April

When the new tax law was enacted almost a year ago, the IRS had to scramble to put in place new rules, forms and regulations. As a result, your take-home pay probably increased in February as employers introduced the new tax withholding guidelines. The idea was that most people will see a tax decrease as a result of the new law. It makes sense to reduce tax withholding so taxpayers can benefit from using their tax savings throughout the year.

It's a great idea in theory, but my concern is that the automatic changes that affected our paychecks will result in millions of taxpayers owing in April, including many who are accustomed to receiving refunds. The Government Accounting Office (GAO) estimates that more than 30 million taxpayers will owe taxes next year. While the IRS endeavored to modify the tax withholding tables to keep taxpayers on track for the year, the effect of the new tax law on individual situations is hard to predict.

To summarize a few changes, the large majority will be taking the standard deduction, and will not be deducting state income and property tax, mortgage interest and charitable contributions. Even if you itemize deductions, the deductible amount of property and income tax is limited. Offsetting these changes, tax rates have largely moved downward. The GAO report said married (but single wage earning) upper-middle class taxpayers with children who itemize their deductions are more likely to not withhold enough in taxes.

To prevent a nasty April surprise, I recommend you contact your tax preparer now or conduct your own tax planning exercise. If you will be owing thousands next year, it would be good to know now so you have a few months to save up for your tax bill.

Determine your tax withholdings. If you are working, consult your most recent paystub and look at the year-to-date numbers. It should say how much has been withheld for federal and state income taxes. Write down those numbers, and then determine how much more will be withheld from your remaining paychecks for 2018. If you're receiving retirement benefits through Social Security, a pension or IRA distributions, then you might have additional taxes withheld. Also, those making estimated tax payments should document those, including the final 2018 payment due in January.

Calculate your income. Your paystub will help you with this task as well. Look at your work income earned year to date and add the amount you'll earn in your remaining pay periods for 2018. You only need to focus on taxable income, so you can subtract 401(k) and other pre-tax retirement plan contributions, health insurance premiums and other deductible expenses. Also make a note if you have income from other sources such as IRA distributions, rental property, Social Security, interest and dividends, business and other sources.

Understand your bigger deductions. Estimate how much in state income and property tax you have paid in 2018. Also approximate mortgage interest (interest rate multiplied by mortgage balance will get you close) and charitable contributions for the year. If you're making HSA or IRA contributions, those are good to note.

Estimate your tax bill. With the information you've collected, you're now ready to get some answers about whether you'll owe or get a refund in April. Intuit, the publisher of TurboTax, has a free app available for IOS and Android called TaxCaster. While the app isn't designed to address more complex tax situations, it does a good job of estimating your tax bill. Another internet resource is the free 1040 Tax Calculator for 2018 on dinkytown.net. You don't need to enter any personally identifiable information to use the tools.

While none of us likes a big tax bill, by checking in with your tax preparer or with a little do-it-yourselfer grit you can come pretty close to understanding your April situation now. If you're going to owe next year, wouldn't you like some time to save for it? It sure beats paying interest and penalties to the IRS that can come with an underpayment of taxes.