Planning ahead for taxes is a New Year resolution most of us make. But it is never too late to consider some last minute strategies for this year…
To help save on the tax bill, it’s always better to plan out strategies to lower taxes, avoid tax penalties and save a bit more money before filing your tax returns. Although the tax year is almost over, you can still work out some ways to save some money on taxes. Before consulting your Long Island tax pro on the best ways to gain tax benefits, keep reading to learn more about ways you can save.
The US Tax Code has gone through a major overhaul and the Tax Cuts and Jobs Act has made several changes that will impact individuals including increasing the standard deduction.
Keep the following new tax law changes in mind as you start planning for your taxes:
- In comparison to 2017, the tax rates and brackets have changed with most tax rates going down. However, if you are paid wages, your payroll department should have adjusted for the rate changes throughout the year.
- The standard deduction increased from $6,500 to $12,000 for individuals, $9,550 to $18,000 for heads of households, and from $13,000 to $24,000 for married couples (joint filers).
- The mortgage interest deduction has changed for mortgage debt used to purchase homes after December 14, 2017. These changes are complicated and will impact many individuals who have home equity lines of credit.
- State and local tax deductions are capped at $10,000 for federal taxes but not necessarily at the state level.
Let’s look at some quick and simple tax savings tips for 2019:
1. Maximize Retirement Plan Contributions
Tax experts say maxing out your retirement plan will help reduce your taxable income. This, in turn, will lower your tax bill. The tax advantages that are offered by retirement savings accounts can lead to significant tax savings. A deductible contribution will help you lower your tax bill this year and moreover, your contributions will compound tax-deferred.
The deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA is April 15, 2019, for those who have not yet funded their retirement account. If you have a Keogh or SEP and you get a filing extension, the contribution is not due until the extension deadline. For 2018, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2018 is $55,000.
If you put away $5,000 a year for 20 years in an investment with an average annual 8 percent return, your $100,000 in contributions will grow to $247,000. The same investment in a taxable account would grow to only about $194,000 if you’re in the 25 percent federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).
If you are in Long Island, remember to consult your Long Island Tax Advisor or Long Island CPA to find out the best tax-advantaged retirement account for you.
2. Prepay certain tax items or move some deductible expenses into the current tax year in order to maximize your deduction
Decide whether itemizing is still for you.
Motley Fool suggests, “It’s well known that mortgage interest is deductible on your tax return, up to a certain limit. By choosing to make your January 2019 mortgage payment before the end of 2018, you could have 13 months of mortgage interest to deduct in 2018 –- not 12.”
As stated above the new law greatly increases the standard deduction. It also places a new limit on itemized deductions, including a $10,000 cap on property and state and local income tax deductions. Taking the standard deduction instead of itemizing may be the right decision for many taxpayers. Work closely with your tax professional to make sure you make the right choice, which depends on factors ranging from your health expenses to charitable contributions.
3. Defer payments until 2019
For the employed, this may be applicable to any year-end bonuses you may expect from your employer and if your employer allows paying year-end bonuses the following year, you can consider taking it the following year. That will put those earnings on the 2019 tax year instead of the 2018 tax year.
For the self-employed, to defer payments until next year, you can invoice later in December to push payments received into the following year if you are on a cash basis of accounting. It is important, however, to note that if you receive the check before the new year it is deemed received whether or not you actually cash the check due to a rule called “constructive receipt”. Also, keep in mind that many clients are looking to PAY vendors for tax planning purposes so you may want to take into account your client’s needs in conjunction with your tax planning!
This strategy is effective only if you expect to stay in the same tax bracket or in a lower one next year. Or else, deferring income can land you in a higher tax bracket and a larger bill. So work out your next year expected earnings appropriately. Reliable Long Island CPA firms and their tax advisors will help you work out your finances for maximum tax benefits.
4. Gifting (Charity, RMD’s, and 529 Plans)
A charitable contribution is a great way to get a deduction. Maximizing savings depends on how well you time it. To deduct the donation this year donate cash by December 31. Donating appreciated stock or property rather than cash can also further boost your tax benefits but make sure you keep the receipts of every contribution, cash or etc.
If you need to withdraw a substantial amount from a retirement plan, figure out if it’s better to take the money this year versus next year or spread out the tax impact by withdrawing some this year and some next year.
Parents and relatives can also benefit from two advanced gifting strategies available with 529 plans: annual gifting and accelerated gifting.
Annual gifting allows an annual gift tax exclusion of up to $14,000 per recipient for individuals and $28,000 for married couples. Accelerated gifting allows a one-time gift to a 529 plan of up to $70,000 per recipient for individuals or $140,000 for married couples, to be contributed and prorated over the next five years — without incurring federal gift tax or using the donor’s lifetime gift tax exclusion. Note that accelerated gifting will preclude annual 529 contributions until the five year period has passed.
The tax implications for 529’s are only at the state level and the actual tax benefit is limited to $10,000 annually in New York, however, the benefit to the beneficiary is substantial.
5. Maximizing Contribution into an HSA if you have a high deductible health plan
HSA’s are an often overlooked tax planning tool available to those who have high deductible health plans. The contribution limit for a family is $6,900 and can be funded until April 15th for the prior year. The contribution is an adjustment that reduces your taxable income, has no income limits prohibiting contributions, and as long as the money is used to pay for medical expenses, it is not subject to income tax.
One important detail that is often unknown is after 65 an HSA is very much like an IRA or 401(k) in the fact that withdrawals can be made without penalty for any reason and are simply subject to income tax unless used for medical expenses. In essence, an HSA acts like an IRA with a tax-free medical option!
Need more information?
Now that you have learned 5 End of Year Tax Tips for 2018, please reach out to us to have a Long Island CPA help implement these strategies for you at 631-661-8410 or email us at firstname.lastname@example.org.