With the fourth quarter well underway and the end of the year right around the corner, it is important to start thinking about year-end tax planning.
There are strategies that can be implemented before filing your taxes for 2018, and some must be accomplished before Dec. 31.
If you are able to contact your tax preparer or professional who filed your 2017 taxes, ask for a summary or comparison of how the new tax law will impact you.
This is an easy report for them to run and will give you a better idea of where you stand prior to filing if nothing has changed in your situation.
Qualified business income
If you are a business owner, you may receive a windfall under the new corporate tax rates. However, not everyone qualifies.
For example, to qualify for the 20 percent deduction on qualified business income (QBI), your taxable income must be below $157,500 if you are single or $315,000 if you are married filing jointly.
Filers who are below those thresholds are allowed to take those deductions regardless of the type of business that they are in.
However, when taxable income is greater than those thresholds, there are limits on who can take the deduction. The law goes much deeper, but as an example, business owners with service-based businesses, such as doctors, lawyers, accountants, financial advisors, etc., cannot take advantage of the deduction if their income is too high.
Accelerating deductible expenses
If you do not expect to be subjected to the alternative minimum tax (AMT) in the current year, an easy way to lower your tax bill is to accelerate your deductions this year.
One deductible expense that you can accelerate is property taxes. You have until Dec. 31 to pre-pay your property taxes that are associated with this year but are due next year. You can then deduct that payment on your tax return.
Another strategy for business owners is to accelerate business expenses. If you’re planning on spending money in your business in early 2019, make the purchases in late 2018 to move the deduction into the current year.
IRA and retirement plan contributions
If you have a company-sponsored 401(k) plan, make sure you are taking advantage of the maximum amount of money allowed to be contributed for the 2018 year.
For 2018, $18,500 is the maximum if under age 50, and $24,500 if over age 50. The deadline for employee contributions for 401(k) plans is Dec. 31, 2018. If you cannot afford to contribute the maximum, try to aim for the max amount that will be matched by your employer.
Free money into a tax-deferred account is a tax-planning dream!
If you only (or also) have an IRA and had earned income in 2018, you have until April 15, 2019, to make contributions for the 2018 tax year. The maximum amount that you can contribute to your IRA accounts (traditional and Roth combined) is $5,500 for the 2018 tax year ($6,500 if you are over 50 years old).
By making contributions to your traditional 401(k), traditional IRA, or both, you will be able to reduce your taxable income for the year. Keep in mind that traditional IRA contributions may not be deductible if you participate in an employer sponsored plan and have income above certain limits.
Please note that Roth IRA contributions are never tax-deductible, but are also not taxed as income when taking withdrawals later in retirement.
Changes to charitable giving rules
With the new tax law, charitable giving deductibility rules have changed to where charitable donations are only deductible if you itemize. Because the standard deduction has increased to $12,000 for individuals and $24,000 for couples, it is a less likely scenario that taxpayers will itemize, thus making charitable donations not have as much of a tax-savings benefit.
However, if you itemize, you can deduct cash contributions to public charities up to as much as 60 percent of your adjusted gross income, up from the previous limit of 50 percent.
One strategy to implement due to these changes is to bundle your charitable donations into a single year. What this does is allow your itemized deductions to add up to a number that is higher than the new standard deduction.
Essentially what you would be doing in the long-run is giving to charity in one year and cutting back in the following year. You can do this by bunching your charitable donations or by using a Donor-Advised Fund.
It is important to keep in mind that the new tax law is set to expire in 2025. This means that even though you can be creating a longer-term tax planning strategy today, things may change in 2025.
Tax planning is one of the most critical aspects of your financial plan, where money can be saved dramatically in the long-run by being knowledgeable about tax law and working with your financial advisor and tax professional.
Tom Breiter is the President of Integra Capital Advisors, a registered investment adviser in Bradenton. He can be reached at 941-778-1900 or by e-mail at: firstname.lastname@example.org.