January 8, 2019

4 tips to seize tax opportunities in the new year

Reducing what you owe in taxes is not unlike the process of trimming your waist line. Both require a plan that is practical and tailored to meet your specific situation. Both also take time and some planning to get to the results you want.

There are a lot of ways to lower your income tax bill before year end, and spacing strategies out throughout the year, such as contributions to retirement plans or to charitable causes, can help you maximize the benefits available. Getting an early start to tax strategies is also important because of some of the individual tax provisions introduced in the 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA). The tax reform law added new considerations and some additional complexity to traditional tax strategies. It also added an expiration date; most of the provisions specifically targeting individuals are currently set to end on Dec. 31, 2025. Because of the finite life, there are additional incentives for individuals to reap the benefits while they last.

The following tips can help you be prepared for that year-end bill.

Review your portfolio

Keep an eye on your investment portfolio throughout the year. Individuals may want to defer interest income by shifting investments to short-term bonds that will not mature until the next year.

If you find that you are recognizing gains from your investments, look for loss positions that can offset them and vice versa. When “harvesting” losses, don’t forget the wash sale rules, which deny the loss if a substantially similar security is purchased 30 days before or after the loss. Also, watch out if you’re invested in mutual funds; they often make large capital gain dividends at year end. You may want to transfer mutual funds to children in lower tax rates before the December dividend record date. Your investment advisor can also help you create a suitable harvesting strategy.

Maximize retirement plan contributions

Making contributions to a qualified retirement plan, like a 401(k) or SEP, not only sets aside money in a tax-deferred vehicle but also reduces your current year’s taxes. For individuals less concerned with the latter benefit, Roth contributions are particularly prudent while tax rates are lower. For 2019, 401(k) plan elective deferrals are limited to $19,000 and catch-up contributions limited to $6,000. SEP annual compensation limits in 2019 are set to $280,000. The 2019 IRA deductible contribution limit is set to $6,000, and the catch-up contribution limit is $1,000.

Plan for the standard deduction with decreased capacity to itemized deductions

Residents in high-tax states like New York or California may end up with the standard deduction, which the TCJA increased to $12,000 ($24,000 for married filing jointly). While accelerating or bunching deductions in order to “itemize” remains a potential strategy, the TCJA capped income and property tax deductions at $10,000, eliminated many other itemized deductions like investment expenses, and placed new limitations on mortgage interest deductions.

For those with itemized deductions, bunching medical deductions to exceed the floor (which was 7.5% in 2018 and is 10% in 2019) is still a strong tax reduction strategy. The TCJA also enhanced the deduction for charitable contributions, increasing it from 50 to 60% of AGI. Making charitable donations, especially of appreciated stock, can help lower your 2019 tax bill.

Enlist a tax provider

The TCJA altered the course for a lot of traditional tax planning strategies. Working throughout the year with a qualified tax provider can help you circumvent any potential roadblocks and maximize available benefits.


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