Year-end planning—meaning taking certain steps before the year ends— is a must if you want to save on taxes. I told you about some excellent strategies last year at this time in a post done jointly with my partner Brian Lovett, CPA, JD, and you should revisit those tips now. Also reread my post on self-employed retirement plans if you have any self-employment income this year—there are steps you may be able to take to shelter all or some of that income.
Are there even more year-end tax-reducing steps you might take before the end of 2018? Absolutely! Here are some to consider…
Claiming the new, increased standard deduction for 2018 might benefit you this year—but that benefit will depend on the extent of your potential itemized deductions and how that total compares with the standard deduction. So take time now to review your situation to see whether it would help you to either accelerate or defer itemized deductions. One example is to consider making next year’s (and possibly later years’) charitable contributions before the end of this year, either directly or through a donor advised fund for later distribution to your charity of choice. Alternatively, you could hold off making charitable contributions until next year and potentially qualify for the increased standard deduction this year.
Unmarried taxpayers with dependent children might be able to file using “head of household” status, which provides for reduced tax rates. To assist taxpayers, the IRS issued Form 866-H-HOH. If you think you are eligible for this, now is a good time to get the documentation together. Likewise, if you will be claiming a tax credit for a shared dependent child, check out Form 866-H DEP or Form 8332.
Capital gain and dividend income may be subject to a 0% tax rate, which can be taken advantage of if you have unrealized capital gains and are thinking of disposing of appreciated shares in the near future. Taxpayers in the 15% (or lower) tax brackets benefit from this 0% tax rate. Further, if you are making gifts to support someone in this situation, making a gift of appreciated shares and having the recipient sell them could result in zero tax (versus having them taxed at higher rates if you simply sold them and then gifted the cash). For 2018, married taxpayers with taxable income up to $77,400 and single taxpayers with taxable income up to $38,700 fall into this situation. If you are in the 0% capital gains tax bracket and do not actually want to get rid of appreciated shares because you want to stay invested in the asset, consider selling them to realize the gain and then repurchasing them immediately to establish a higher basis for when you ultimately no longer want to invest in them. Don’t worry about the “wash sale” rules in this case—those rules apply only to losses, not gains.
If you had a low-income year or incurred a large business loss, it might be to your advantage to accelerate income into 2018 so it would either be taxed at a low rate or not taxed at all because of the loss. Examples of ways to accelerate income are redeeming U.S. savings bonds, rolling over a portion of your traditional IRA into a Roth IRA, redeeming a tax deferred annuity (if possible without penalty), selling appreciated short-term capital gain stock and selling shares to establish a higher basis as was mentioned earlier.
Shareholders of mutual funds that typically distribute “capital gain dividends” prior to year-end should consider disposing of their fund shares before those dividends are declared. Otherwise, it is quite possible that tax on these capital gains will be greater than the actual income earned during the year.
People with household employees might be required to withhold certain taxes and must report the wages paid and pay FICA and Medicare taxes on the wages. Household employers may also be required to pay state unemployment insurance tax. To keep from running afoul of the IRS and/or your state, it’s vital that you become familiar with the tax payment and reporting requirements. These are usually done on a Schedule H included with the taxpayer’s individual tax return, Form 1040.
If you had an unusual taxable transaction during the year, I suggest that you meet with your tax advisor prior to year-end to determine the tax impact of the transaction and the timing of any required tax payments. This serves multiple purposes—the transaction can be reviewed during a less hectic time than the tax filing season, there will be unhurried time to obtain any necessary additional information and you can get a heads-up on the taxes due and when they need to be paid. Also, this will shift time away from the filing season, which can speed up the completion of your return.
Employees who have to pay out of pocket for employee business expenses will no longer get a tax benefit that helps offset these payments. Employees who are paid a salary and who are not subject to hourly wage rules or who expect to receive a bonus can request that their employer reimburse them for the expenses and reduce their remaining salary for the year or their bonus by a similar amount. This would save the employee taxes on the reimbursed amount, in effect giving a full deduction for those amounts, and will save the employer its portion of the FICA and Medicare taxes. Of course, the expenses must be fully documented when submitted to the employer.
Consider liquidating an S corporation if there was a large capital gain from the sale of the business’ assets and there remains a high basis in the S Corp stock that would not otherwise be able to offset the gain.
If you were required to make estimated tax payments in 2018 and did not, you should consider taking an IRA distribution and having the funds applied to withholding tax. If you do not want to treat this as a taxable distribution, repay the gross amount to the IRA within 60 days, designating it as a tax-free rollover. Note that such distributions can be done only once in a 365-day period. This can be a tricky move, so be sure to consult with a knowledgeable tax expert before doing it. (As you should with all important or tricky tax decisions!)
If you made a charitable contribution of property that is valued in excess of $5,000, you must obtain a certified appraisal before you file your return. If you don’t have it, you will not be able to take a tax deduction on the gift for any amount.
And finally, not to seem unromantic, but if you are planning to get married before the end of the year, consider whether it might be more advantageous tax-wise to push your wedding into next year. To get a sense of this now, you (or better yet, your tax advisor) will need to back-envelope your combined tax liability two ways—married before the end of 2018 and not married before the end of 2018—and see which is more advantageous. If it’s “not married,” you wouldn’t have to wait very long to tie the knot—January 1 would do it!