12 tax strategies to consider before the end of the year

November 06, 2018


With the Tax Cuts and Job Act (TCJA) signed into law late last year, many people have questions about what strategies they should employ. With the end of the year rapidly approaching, now is the time to make plans. Here are a dozen strategies that can optimize end-of-year planning:

1. Review withholding

If you receive W-2 wages, review 2018 withholding and evaluate changes to your W-4. The TCJA brought new tax withholding tables. Determine if your current withholding will allow you to avoid underpayment penalties.

2. Harvest stock losses

Review stock sales and harvest any losses to offset capital gains taxes. Losses can reduce taxable income by $3,000 for joint filers, but capital losses have an unlimited offset for capital gains. Unused capital losses can be carried forward indefinitely.

3. Bunch itemized deductions

The individual standard deduction is now $12,000, meaning fewer people may benefit from itemizing deductions. However, bunch qualifying expenses if you’re planning to itemize. Make more donations in years you itemize, and fewer in years you take the standard deduction. Property taxes and state and local taxes are now limited for deductibility.

4. Push or pull expenses

Some expenses can be pushed into the next year or pulled into this year. This is important to consider if you’re planning to itemize deductions. Expenses that can be pushed or pulled might be estimated property taxes due next year, estimated state income taxes due next year, mortgage interest, medical bills or charitable donations.

5. Medical expense deductions

If you choose to itemize, it’s important to note that medical expenses have a new lower threshold for deductibility. The new threshold dropped from 10% of adjusted gross income to 7.5% for 2018. However, in 2019, the threshold will return to 10% of AGI.

6. Property tax expenses

The TCJA capped the amount that can be itemized for property and state income taxes or sales taxes at a combined $10,000. Depending upon the value of your property, the sales tax deduction may be more valuable for Texas residents, since we do not have an income tax.

7. Revisit the Alternative Minimum Tax

The exemption increased this year, so you may be able to recapture some of the AMT paid in previous years.

8. Fund retirement

Retirement savings plans— whether 401(k), SEP or IRA—all offer opportunities for a tax deduction on contributions, tax deferral on earnings, and creditor protection. Even without an employer match, a 401(k) is still a very worthwhile opportunity. If you have a non-employed spouse, you can also fund an IRA on their behalf.

9. Evaluate converting a Traditional IRA to a Roth IRA

Doing so causes the amount converted to be taxed in this year. However, once converted, the assets and earnings in the Roth are tax-exempt. Since the lower tax brackets have been widened this year, it pays to analyze how much can be converted before bumping into the next higher tax bracket. Additionally, a Roth IRA is not subject to required minimum distributions that apply to people aged 70 ½ or older.

10. Donate a required minimum distribution (RMD)

People aged 70 ½ or older have required minimum distributions from their 401(k) or IRAs. This required distribution is counted as fully taxable income unless you donate it to charity. A qualified charitable distribution sends the RMD directly to a qualified charity of your choosing. However, the charity gets the full amount of the distribution and you pay no tax on the RMD. It’s a win-win proposition.

11. Donate appreciated stock

Assume you’ve held stock for quite some time with significant appreciation. If you sell that stock to fund a charity, you must first pay taxes upon liquidation. However, if you donate the stock directly to your favorite non-profit, they get the full benefit of the donation, and you avoid paying capital gains tax. Furthermore, you can still qualify for taking a charitable deduction on your tax return if you itemize. This is a better way to benefit charity compared to donating cash.

12. The Kiddie Tax

For 2018, the kiddie tax assesses a child’s investment income above $2,100 at the same rates as trusts and estates—which is typically higher than individuals. If the child is a full-time student providing less than half their financial support, the tax usually applies until the child turns age 24.

Evaluating these strategies now can offer you some legitimate opportunities to lower your 2018 taxes. However, time is running out for 2018, so it’s wise to act quickly.

Dave Sather

Sather Financial Group

Dave Sather is a CERTIFIED FINANCIAL PLANNER and President of the Sather Financial Group, Inc. Sather Financial Group is a $400 million “fee-only” wealth management firm based in Victoria. Sather Financial is ranked as one of the top independent wealth management firms in the country according to Financial Advisor Magazine. Dave was raised in El Paso, received his B.A. in Business Management from Texas Lutheran University and received his M.B.A. from Texas A&M University. He has spent the past twenty years in the financial analysis, investment and banking industries. Dave is an adjunct professor in the business program at Texas Lutheran University. Additionally, Dave is a director of Business Bank of Texas as well as the Chairman of the Finance and Investments Committee for the Brownson Children’s Home and is a member of the Executive Advisory Council at Texas Lutheran University. He resides in Victoria, Texas.
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