Learn 6 year-end tax tips to maximize your tax refund or minimize the taxes you owe
Act before December 31 to increase your tax breaks. Whether you are having a good year, rebounding from recent losses, or still struggling to get off the ground, you may be able to save a bundle on your taxes if you make the right moves before the end of the year.
Defer your income
Income is taxed in the year it is received—but why pay tax today if you can pay it tomorrow instead? It’s tough for employees to postpone wage and salary income, but you may be able to defer a year-end bonus into next year—as long as it is standard practice in your company to pay year-end bonuses the following year. If you are self-employed or do freelance or consulting work, you have more leeway. Delaying billings until late December, for example, can ensure that you won’t receive payment until the next year. Whether you are employed or self-employed, you can also defer income by taking capital gains in 2019 instead of in 2018.
Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that’s likely, you may want to accelerate income into 2018 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.
Beware of the Alternative Minimum Tax
Sometimes accelerating tax deductions can cost you money… if you’re already in the alternative minimum tax (AMT) or if you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class. The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.
This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT.
State and local income taxes and property taxes, for example, are not deductible under the AMT. So, if you expect to be subject to the AMT in 2018, don’t pay the installments that are due in January 2019 in December 2018.
Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting”—selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar. And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2018 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes. Company-sponsored 401(k) plans may be the best deal because employers often match contributions. Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($18,500 for 2018, $24,500 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions. Also consider contributing to an IRA. You have until April 15, 2019 to make IRA contributions for 2018, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. Making deductible contributions also reduces your taxable income for the year. You can contribute a maximum of $5,500 to an IRA for 2018, plus an extra $1,000 if you are 50 or older. Use a IRA Calculator to see how much you can contribute. If you are self-employed, a good the retirement plan might be a Keogh plan. These plans must be established by December 31 but contributions may still be made until the tax filing deadline (including extensions) for your 2018 return. The amount you can contribute depends on the type of Keogh plan you choose.
Avoid the kiddie tax
Congress created the “kiddie tax” rules to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to junior’s low bracket. For 2018, the kiddie tax taxes a child’s investment income above $2,100 at the same rates as trusts and estates which are typically higher than rates for individuals. If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24. So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is too large and the child’s unearned income exceeds $2,100, you could end up paying taxes at the same rates as trusts and estates.
Watch your flexible spending accounts
Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees steer part of their pay into a special account which can then be tapped to pay child care or medical bills. The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious “use it or lose it” rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don’t use it all by the end of the year, you forfeit the excess. With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2018 set-aside money as late as March 15, 2019. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
DISCLAIMER: This article, is intended for general information only. I am not a CPA, tax attorney, or Enrolled Agent. Consult with your tax professional for information relating to your specific situation.