Year-End Tax Moves to Consider Before December 31
There are only a few weeks left in 2018, but you still have time to take steps that can put you in a more favorable tax position. Because of the new tax law, many taxpayers aren’t sure about what year-end actions make the most sense. For example, are certain tax incentives that are available in 2018 going away in 2019? Will some provisions be more valuable next year than this year?
Here are some year-end tax planning moves that you should consider discussing with your accountant before the end of the year.
Contribute to Health Savings Account
If you have a health savings account (HSA), you can make the maximum contribution for an entire year even if you didn’t become eligible, for example, until October of 2018. If you make that maximum contribution, you could qualify for a tax deduction, which will depend on whether you have individual ($3,450) or family ($6,900) coverage. Those age 55 and older receive an extra $1,000.
Preserve Your Investment Position
You can realize investment losses for tax reporting purposes but still retain an equal or nearly equal investment position. For example, suppose you have paper losses in a certain stock and want to continue investing in that business or sector. You have two options. You can sell the shares and replace them by purchasing shares from the same business or another company within the same sector. Another option is to sell the original holding, wait 31 days, and buy the same securities.
Bunch Charitable Donations or Medical Expense Payments
With the new tax law, the standard deduction has significantly increased and many itemized deductions have been decreased or eliminated. Bunching can help you move deductions into the year in which you’ll benefit most from a tax perspective. It may be beneficial to donate more to charity or pay more of your medical expenses in 2018. Depending on your situation, it might make more sense to push them off until 2019. Talk to your accountant.
Take Required Minimum Distributions from Retirement Plans
If you’re 70 ½ and you don’t take your 2018 required minimum distribution from your 401K, IRA or some other retirement plan, you could be facing a penalty of 50 percent for every dollar of the distribution that you don’t take. If you turned 70 ½ in 2018, you can wait until 2019 to take the first distribution, but you’ll have to take a double distribution in 2019. This would make sense if you expect to have a lower tax rate in 2019.
Donate Directly from Your IRA
A qualified charitable contribution is transferred directly from an IRA to a charitable organization. If you’re 70 ½ or older, have an IRA, and don’t need required minimum distributions for living expenses, a qualified charitable contribution could result in tax savings because it would reduce the required minimum distribution amount that is included in your adjusted gross income. The maximum transfer is $100,000.
Give Gifts to Loved Ones
You can give money or assets valued up to $15,000 to another person, or up to $30,000 if you split the gift with your spouse, without paying a gift tax. Annual exclusion gifts shift future appreciation and earnings of the gift, and the associated tax obligation, to the recipient who is typically in a lower tax bracket. These gift limits apply to gifts to individuals, not charitable organizations.
Getting Divorced? Finalize the Agreement
If you make alimony payments under a divorce or separation agreement executed in 2018, those payments are tax deductible. For the payee, they count as income. That won’t be the case in 2019. In most cases, folks going through a divorce would benefit by having their agreement finalized by the end of the year.
The final weeks of the year can have a major impact on your tax obligation. Consult with your accountant to determine which actions you should take to enhance your tax position.