9 end-of-year tax tips for procrastinators and planners alike
That last-minute search for end-of-year tax tips that could save money is even more hectic this year as consumers try to figure out how tax reform changes what they can do. Here are nine tips to help consumers understand their options and how tax reform might impact those options:
1. Remember use-it-or-lose-it money in flexible spending accounts.
Taxpayers don’t pay taxes on money they put in a flexible spending account (FSA), and that tax-free money must be spent on qualified medical expenses before the designated deadline.
“Whatever funds you don’t spend before the end of the year – or grace period, if your company’s plan provides one – is just money left on the table,” said Nathan Rigney, lead tax research analyst at The Tax Institute at H&R Block.
Instead, taxpayers should make sure to use this money for unreimbursed medical expenses, like eyeglasses, prescription medications, medical equipment or copays. If they still have flexible spending account money to spend in November and December, they could go see their doctors or buy prescription medicine they will need in 2019.
2. Plan to accelerate or delay payments.
Because tax reform nearly doubles the standard deduction, fewer people will itemize. But for those who are close to the standard deduction of $12,000 for single filers and $24,000 for married couples filing jointly, bunching their itemized deductions could help them get over the standard deduction every other year. For example, they may wait until January to make some payments or donate to charity. Delaying those expenses until 2019 could boost their ability to itemize for tax year 2019.
Or, if they think they’ll have fewer eligible itemized expenses in 2019 than in 2018, they might be able to accelerate some payments and shift some deductions from next year to this year.
In all these cases, taxpayers should remember the most beneficial tax planning occurs over a multi-year horizon and paying an extra amount this year could hurt some taxpayers in 2019.
3. Estimate income and determine if a tax benefit phaseout could affect the tax return.
Many tax benefits generally phase out, usually as an individual’s income increases. At a certain point, the tax benefit may be eliminated or it may be available only at a small amount. If eligible taxpayers are close to a phaseout range of a tax benefit, they could try to lower their adjusted gross income (AGI) so they can claim the tax benefit. This can be done by contributing as much as possible to a pre-tax retirement plan, such as a 401(k), 403(b) or a deductible IRA.
4. Contribute to a retirement account to lower adjusted gross income and taxable income.
Lowering AGI and taxable income is always good, even if the taxpayer is not at risk of getting phased out of a tax benefit; lowering AGI and taxable income also means paying less tax and could reduce the amount of Social Security subject to tax or any net investment income tax.
Contributing to a pre-tax retirement plan lowers both AGI and taxable income. These plans include 401(k)s, 403(b)s, deductible IRAs, SIMPLE IRAs and SEPs. Taxpayers have until Dec. 31 to make contributions to 401(k)s and 403(b)s for the current tax year. They have until the filing deadline of the tax year to make contributions to IRAs and some other plans.
5. Consider a qualified charitable distribution to lower adjusted gross income and taxable income.
Taxpayers who are at least 70½ could consider a trustee-to-trustee transfer of some or all of their required minimum distributions to a qualified charity.
“Some retirees may not have enough expenses, like home mortgage interest or out-of-pocket medical expenses, to justify itemizing their deductions. By making a qualified charitable rollover, they can get a tax benefit even if they do not itemize,” Rigney said.
6. Donate to a charity to lower taxable income.
If taxpayers itemize, they can lower their taxable income by donating to charity. They must give to a qualified charity by Dec. 31 and keep the necessary documentation, which will vary depending on the type and amount of the gift.
7. Sell certain securities.
Taxpayers with a large net capital gain so far this year might want to sell some stock to generate a loss before year end. This strategy, called “tax loss harvesting,” can reduce the amount of capital gains subject to tax. But in any case, taxpayers should not let possible tax savings cause them to make a decision contrary to their overall investment strategy or financial needs.
8. Investigate before buying mutual funds.
Taxpayers who are planning to invest a large amount in a mutual fund should find out when the fund declares and pays its dividend.
“Confirm that the fund isn’t declaring and paying a large amount of dividends before the end of the year,” Rigney said. “Buying shares before the dividend is declared could mean you’ll increase your income by the amount of the dividend paid in 2018. This is true even if you reinvest the dividend in new shares.”
Taxpayers should look for this information at the fund company’s website.
9. Update paycheck withholding.
Tax reform and paycheck withholding changes upset the balance taxpayers seek between the size of their refund and the size of their paychecks. After tax reform, taxpayers need to update their W-4s with their employers so they continue to get the balance they want. While it’s too late in the year to meaningfully impact their 2018 return, updating their W-4 now means they can start off 2019 just how they want.
After taxpayers make their final tax moves for 2018, they can look forward to filing their return, and then start tax planning – or procrastinating – for 2019.