Money moves to help reduce your tax burden before year-end
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The new tax law is adding a wrinkle to traditional end-of-year money moves.
The higher standard deduction – $12,000 for singles and married couples filing separately, $18,000 for heads of household and $24,000 for married couples filing jointly – means many more Americans will ditch itemizing their 2018 federal tax returns. TurboTax estimates that 90 percent of returns will take the standard deduction, up from 70 percent before the changes took place.
That means you probably should focus on year-end tax strategies that first lower taxable income, rather than maximize tax deductions. Here’s what you should consider and when.
Get the most from investment losses
Given the late-year market volatility, there’s a chance some of your investments were bad bets. If any of those losses are in a taxable account, such as an investment account, bank account or money market mutual fund, consider selling it to realize the loss. These losses can offset other taxable gains you had during the year. If the losses exceed your gains, you can use up to $3,000 of excess losses to reduce other income.
Increase retirement savings
There are two good reasons to contribute the maximum amount to your retirement accounts. One, you’re setting yourself up for financial security when you hit your golden years. Second, many of these contributions reduce your taxable income.
To bump up your contributions to your employer-sponsored plan before year-end, increase the amount that is withheld from your last paychecks of the year. For 401(k)s and other employer-sponsored plans, you can fund up to $18,500 a year or $24,500 if you’re 50 or older. Don’t forget to reset your withholdings at the beginning of 2019.
Contributions to traditional IRAs are also fully or partially tax-deductible, depending on if you fund an employer-sponsored plan. Max contributions are $5,500 and $6,500 if you’re 50 or older. Contributions to Roth IRAs are not tax deductible.
Max out HSA
If you have a high-deductible health plan (HDHP) and haven’t fully funded your health savings account, or HSA, for this year, do it before the 2018 tax-filing deadline to get a bigger deduction. Individuals can contribute up to $3,450 this year, while families can fund up to $6,900. If you’re 55 or older, you can make an additional $1,000 catch-up contribution.
Unlike FSAs, funds in these tax-advantaged accounts can roll over indefinitely and are a savvy way to save for future medical expenses, especially in retirement. HSAs also have a triple tax benefit. First, contributions are tax-deductible – even if you don’t itemize. Second, any earned interest is tax-free. Last, withdrawals are tax-free if used to pay for qualified medical expenses.
Soften the RMD tax hit
Each year, you must withdraw a minimum amount from certain retirement accounts such as 401(k)s, IRAs and other qualified plans if you’re at least 70½. These required minimum distributions are considered income and are taxable. If you contribute the RMD directly to a charity, it won’t be considered ordinary income, lessening your tax burden.
Spend FSA money
Don’t waste these pretax dollars that have already reduced your taxable income. Spend the funds before year-end. The money in health care flexible spending accounts typically doesn’t roll over to the next calendar year. But check with your human resources department because some employers allow $500 to carry over into the new year or give you until March to spend the funds in an FSA account.
Otherwise, schedule last-minute eye exams, medical check-ups and flu shots before Dec. 31. Besides prescriptions, you can also use FSA dollars to purchase the following items typically found at any drugstore:
- Over-the-counter bandages
- Contact lenses and solutions
- Eye glasses (even over-the-counter reading glasses)
- First-aid kits
- Hand sanitizer
- Pregnancy tests
- Eyeglass repair kit
- Lens wipes
If you’re on the cusp of itemizing your 2018 tax returns because your total deductions nearly match the standard deductions, here are few strategies to increase your deductions to get you over the hump.
• Medical treatment: If you spend more than 7.5 percent of your adjusted gross income this year on medical expenses, you can deduct those costs. Make an appointment before Dec. 31 for any treatments you’ve put off.
• Property taxes: If you paid less than the $10,000 limit for state and local taxes, consider prepaying your 2019 property taxes – if your state allows it – to get the most from the state and local taxes deduction.
• Mortgage interest: If you’re not close to the cap on the mortgage interest deduction – which is $750,000 after the new tax law – pay your January mortgage payment in December to increase the amount of interest you paid during the 2018 tax year.
• Charitable donations: If you regularly donate to a charity, double up contributions and make your 2019 donation before year-end. If you put the double donation into a donor advised fund, that contribution is immediately tax-deductible. That means you can take the deduction for 2018, but make distributions to charity next year or beyond.
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