Cue up the Andy Williams because It’s the Most Wonderful Time of the Year! According to the Tax Foundation, most Americans have to work nearly 4 months each year just to pay their tax bill! So by summer, you’ll actually be making money for yourself – but until then, you’re working for Uncle Sam. And they say It’s A Wonderful Life….alright, I promise I’m done with the cheesy holiday references. However, just like the rush to get your last-second shopping done each year, we still have some time to improve your tax return, and maybe save you a few days in the race to Tax Freedom Day. Let’s take a closer look at some of these ideas, starting with the easiest and applicable to most.
- Defer more money into your retirement plan. If you have a 401(k) at your place of employment, put some additional dollars into it before the end of the year. This is advantageous in two ways. First, it’s additional savings for retirement. Second, it ultimately lowers your taxable income. There are limits that you must adhere to. For 2018, that figure is $18,500 of deferrals from your pay ($24,500 if over age 50). If eligible, a contribution to a Traditional IRA can yield the same type of tax savings, albeit more modest contribution limits of $5,500 ($6,500 if over age 50).
- Do you own a small business, or have a side hustle? You may be eligible to set up a small retirement plan for that income. A SEP or SIMPLE IRA may be just right. Nearly no administrative burden and low-cost if set up correctly. Read more here.
- Do you participate in a HSA-eligible health insurance plan? If so, make sure you fund your HSA at the highest possible level you can. For single filers, the limit for contributions for 2018 is $3,450; for families it is $6,900. Tack on another $1,000 if you’re over the age of 55. HSA’s are great; as a matter of fact, I consider them one of the best investment opportunities available. For the record, you have until April 15th to get this one done.
- The stock market has been (essentially) going up for the past 9+ years so there haven’t been a lot of investment losses for most. However, things have been bumpy this year, and interest rates have been going up. Take a look at your non-retirement after-tax accounts. If you have unrealized losses in there, you can do what is called tax-loss harvesting – the act of selling something at a loss so that you can use those capital losses to offset other investments that have a capital gain. There are some rules to be weary of, primarily the Wash-Sale rule which prohibits how quickly you can repurchase an investment that you sold for a loss, but don’t let this stop you. But here is the best part…the IRS allows you to deduct up to $3,000 of a capital loss against your Ordinary Income. For example, if you can take $15,000 of capital losses, you should only harvest $12,000 of capital gains and leave the remaining $3,000 to offset your Ordinary Income.
- The Tax Cuts and Jobs Act (TCJA) passed last year changed the way many Americans will complete their tax return. Rather than itemize deductions on Schedule A, the Tax Policy Center expects roughly 27 million people to shift to the Standard Deduction ($12,000 single; $24,000 married filing joint). The reduction in how much you can deduct for State & Local taxes, along with real estate taxes is a big reason why more will be standard deduction filers. By becoming a standard filer however, you in essence have lost your deduction for charitable gifts. Let’s look at a quick example for a married couple filing a joint tax return:
- Medical Expense Deduction: $0
- State/Local/Real Estate Taxes Paid: $17,000 (capped at $10,000 under new law)
- Charitable Gifts: $10,000
- Total deductions allowed after new caps: $20,000 (less than $24,000 Standard Deduction)
Under the old rule, you would have been allowed to deduct $27,000. In fairness, because of the new rule, you actually only lose $3,000 worth of deduction, but if you look closely, you will see that your charitable gifts had no tax benefit. Let’s be clear – that’s not why we make those gifts….but it is nice to get a tax benefit when possible! We are using a strategy called charitable bunching to help clients who consistently give to charity, that will allow them to get some tax benefits at the same time.
First, they establish a Donor-Advised Fund at one of the many institutions that hold them, such as Schwab, Fidelity, Vanguard, or a local community foundation. Then they fund them in year 1 with two years of their expected charitable gifts in order to qualify for itemized deductions on their tax return. From the Donor Fund, they make grants (i.e. gifts) to their charities of choice. In year 2, they use the Standard Deduction and continue to grant from their Donor Fund. In years 3 and 4, simply repeat the process. If you’re near retirement and have charitable intentions for retirement, consider loading up a Donor Fund today while resources are more plentiful to help alleviate the financial strain of giving from your retirement income. A more in-depth look at charitable giving can be found here.
Uncle Sam is making a list and checking it twice. If you think we can help you manage your tax strategy, let us know!