Now’s the time to reflect on your gains and losses of 2018 and the tax bill that might result
With just a few weeks left in the year, we all need to take a moment to reflect on the gains and losses that 2018 brought, and the tax bill we’ll have to pay as a result.
If you don’t already have a rough estimate of your 2018 income, now’s the time to work one up. Hold a year-end tax-planning meeting with your tax adviser to estimate this year’s tax rate. If your tax bill seems like it could be lower, there are some things you can still do to reduce your 2018 tax bill.
Delay income, speed up deductions
Traditional year-end tax planning involves delaying income into the following year where possible. At the same time, the normal strategy in the past has been to apply deductions to the current year.
These strategies can still work, but the 2017 tax act’s new higher standard deduction means more complex planning might be needed. “Bunching deductions” will be a more effective strategy for many individuals. This might mean postponing deductions this year, and accelerating deductions next December. The goal is to get as many deductions as possible in a single tax year, and take the new, higher standard deduction in the other years.
Make retirement plan contributions now
One of the best ways available to most individuals to save on taxes is by contributing to a retirement plan.
Employees can avoid income tax on up to $18,500 of income deferred into a 401(k) plan in 2018. Those who turn 50 by the end of year can defer an extra $6,000 as a “catch-up” contribution.
The deadline for contributions to most employer-sponsored plans is Dec. 31. Contributions must come from a paycheck, so there are only a few more opportunities to take advantage of this deduction in 2018. Review your paystub right away, and make sure you make the most of these tax perks.
If you are a business owner or self-employed, you still have time to set up a plan and get a deduction for 2018. Time is running short, so don’t delay.
Harvest Tax Losses
Tax loss harvesting is one way to get an extra tax advantage from your investment accounts.
The strategy involves selling positions where you have a loss, so that you can take gains in other positions without creating a tax bill. The IRS has certain rules for this strategy. If you buy or sell a security within a certain period of time, the “wash sale rule” could apply, negating the tax benefit.
This strategy only works in taxable brokerage accounts. It doesn’t work in qualified retirement accounts. If you hold investments in a taxable account, look at your gains and losses now. If you aren’t sure how to do this properly, seek the advice of an investment professional who is also qualified to give tax advice.
Tax reform means that many of us will have significant changes to our tax bill.
Most effective tax-planning strategies need to be put in place by the end of the year. Fortunately, there is still time. Meet with your tax adviser before year-end. If you don’t have a qualified tax adviser, find one before it’s too late.
Peter C. Golotko is president and CEO of CPS Investment Advisors. Matthew Treskovich is the chief investment officer.