5 Tips for Savings Money on Your 2018 Tax Bill
Let's face it: Few of us are going to wake up the morning of Dec. 31 and finish all the year-end action items on our list for cutting taxes. It's thus best to get started with about a month remaining in 2018.
Here are areas you might want to address:
Alternate your itemized deductions
You're going to hear more about "bunching" as a tax strategy. The idea here is to incur more deductible expenses in one year then skip them the next, or vice versa.
The strategy makes sense if you wouldn't normally have quite enough deductions to itemize every year, now that the standard deduction has nearly doubled as a result of tax reform.
Possibly 90 percent of taxpayers might opt to take the standard deduction ahead, up from about 70 percent, according to Treasury Department projections. Yet people in the ballpark for itemizing might be able to alternate between the two strategies.
The new $10,000 cap on state taxes and the elimination of the interest deduction on home equity loans in some cases are among the changes that will make itemizing harder to justify for many people, said Tim Steffen, director of advanced financial planning for Baird's Wealth Strategies Group.
"By accelerating or deferring the payment of certain expenses between tax years, a taxpayer can alternate between itemizing and claiming the standard deduction, thereby maintaining as much tax benefit for those expenses as possible," he said.
Most deductible expenses, such as state taxes and mortgage interest, aren't flexible enough to be switched from one year to the next, Steffen noted. "However, charitable contributions lend themselves perfectly to this strategy."
Time end-of-year transactions
Related to the idea of bunching deductions is accelerating, or delaying, some expenses and possibly even the receipt of income.
Medical expenses are one possibility. You might find that you can pay for certain medical costs either over the waning weeks of 2018 or wait until 2019. Examples range from buying new glasses to taking elective procedures. Why accelerate them into 2018? Because medical costs will be harder to write off next year.
This is the last year medical expenses are deductible on federal returns to the extent they exceed 7.5 percent of adjusted gross income. In January, that rises to 10 percent, meaning fewer expenses are deductible. (Medical costs will remain fully deductible on Arizona income-tax returns, this year and next.)
In other respects, timing deductible expenses won't work as well as it did in the past. For example, a common strategy in prior years was to accelerate state income-tax and property-tax payments before the year expired to lock in the tax benefit. With state taxes now capped at $10,000, there's less incentive to do that, or none at all, Steffen said.
Taxpayers thus might be better off just making these payments on a regular basis.
Find deductible investment losses
"Harvesting" is another informal tax term that might gain in popularity, thanks to the stock market's recent sell-off.
Investors who realize or lock in trading gains or losses first need to sort through the pile, as short-term losses offset short-term gains, while long-term losses offset long-term gains. (Short-term gains and losses are those held one year or less.)
Then, if total losses exceed gains, up to $3,000 of the remaining loss can be used to offset other income, meaning they can be deducted, Steffen said. Losses above $3,000 can be carried forward to offset gains in the following year. Tax reform didn't change this format, he added.
Amid the stock market swoon, a lot more investors now have losses that looked like gains just a few weeks ago, potentially bringing this strategy into play. Just note that it works only with investments held in taxable accounts – not those in IRAs, workplace 401(k) plans and other tax-sheltered vehicles.
Steffen discourages investors from recognizing losses just for the tax breaks that might accrue. If an investment still makes sense, it's probably worth retaining, he said, especially as you can still take the loss next year to offset gains at that time.
Avoid 50-percent penalty
One of the nastiest tax penalties awaits people who fail to take required minimum distributions or RMDs from Individual Retirement Accounts before year-end.
The penalty of 50 percent applies to the amount that was supposed to be withdrawn but wasn't. It pertains to people older than 70½. RMDs apply to traditional IRAs (including rollovers, Simple IRAs and SEPs or Simplified Employee Pensions) but not to Roths (while the owner is still alive).
Fidelity Investments reported that only about 50 percent of its RMD-eligible customers had made any such withdrawals as of late October. Another 13 percent had taken out some money but not enough to fully skirt the penalty.
IRA owners can delay taking that first required withdrawal until April 1 of the year after they turn 70½. But for those who delay, both the first and second RMDs must be taken in the same year, with the withdrawals taxed as ordinary income.
People still working past 70½ can delay an RMD on a 401(k) account until April 1 of the year after they retire, for those plans that allow this option.
Give your withdrawals to charity
Last year's tax-reform legislation preserved the option of donating RMDs to charity. Up to $100,000 a year can be transferred directly from an IRA account to one or more eligible charities.
Why consider this? Because the amount is excluded from taxable income and taxpayers don't need to itemize to do this, but you obviously would need other money to live on.
By using the charity-donation strategy on RMDs, taxpayers not only reduce their taxable income by the amount of the donation but also could shave or eliminate capital gains taxes they might incur if the IRA withdrawal had pushed them into a higher tax bracket, noted the National Association of Enrolled Agents.
Tax reform retained the zero-percent tax on long-term gains for lower-income people — singles with taxable income below $38,600 and married couples below $77,200.Some affluent seniors could find themselves in this group.
By Russ Wiles for USA Today