6 Savvy Year-End Tax Moves To Make Now
As we transition from fall to winter, celebrating the holidays with family and friends and planning winter getaways occupy a lot of our time and attention. Equally important, if not more so, you should also prepare your finances to take advantage of specific tax-saving opportunities before the end of the year. This is especially true for 2018, the first year of the Tax Cuts and Jobs Act. Considering changes in income tax rates and traditional deductions, it is critical to invest time in year-end planning rather than wait until next year to file your taxes and hope for the best. I have outlined six steps that individuals and business owners can consider as part of the planning process.
#1 Review your portfolio.
Now is the time of year when it is best to review your portfolio for any investments with negative returns to help you win at tax time. Investments that boast a positive gain at the end of the year are subject to capital gains taxes. Investments sold at a loss, however, can be used to offset gains and show reduced earnings on your portfolio. Reduced earnings can often mean reduced taxes. You can only apply losses on long-term assets, like stocks, exchange-traded funds, and mutual funds, against the gains on similar classes of long-term assets. These are assets that one has held for at least one year and one day. The same rule applies to assets held for one year or less. Short-term losers offset short-term winners.
#2 Give to charity.
Thanksgiving through the end of December is the time of year when Americans show their generosity the most. Giving to charities is a way to give back to society and enjoy tax benefits at the same time. Donor-advised funds enable taxpayers to bunch multiple years of contributions together in a single year to surpass the itemization threshold established through the Tax Cuts and Jobs Act of 2017. Based on their income and other tax considerations, they may take the standard deduction in the off-years, or skip-years. Donors can receive a higher deduction by combining multiple years of charitable giving into a single year. They can then decide the timing and amounts of money to direct to the charities of their choice.
#3 Increase contributions to your retirement plan.
Participants in employer-based, defined contribution retirement programs, such as 401(k), 403(b), and 457 plans, who haven’t maximized their contributions may wish to increase their deposits before year-end. The employee deferral limit for 2018 is $18,500. A “catch-up” provision of $6,000 is available to participants age 50 and over, bringing the total available contribution to $24,500. The limits are rising by $500 for 2019 to $19,000 and $25,000.
#4 Consider a profit-sharing plan.
Owners of small businesses seeking to save more money than the 401(k) limits may wish to consider setting up a profit-sharing plan. Employers do have control over the company’s annual contribution to the plan. “New comparability” profit-sharing plans generally allow employers to establish classes of employees based on various criteria. They can contribute anywhere from zero to $55,000, providing the plan passes government-established tests that don’t discriminate against the lower-compensated employees. Self-employed individuals can establish a solo 401(k) or Simplified Employee Pension IRA. The deadline for setting up and contributing to a SEP IRA is the tax-filing deadline, including extensions.1
In contrast to defined contribution plans, defined benefit plans provide employees with a guaranteed benefit to be paid out of the plan at retirement.2 Many small businesses establish defined benefit plans to take advantage of much larger tax-deductible contributions that are not available with defined contribution plans. The employee could take a consistent, systematic payout or roll over the nest egg to an IRA on a tax-deferred basis.
#5 Learn about available tax incentives.
Many high net worth individuals seek opportunities to reduce their taxes through various legal means beyond employer-based plans. As an incentive to preserve open space for the benefit of communities around the United States, the federal government provides tax incentives to farmers and landowners to not sell their properties to developers. A conservation easement is a voluntary legal agreement between a landowner and a land trust or government agency that permanently limits use of the land in order to protect its conservation values.3 Tax incentives offset some of that loss in property value, making conservation a viable option for more landowners. Investors can financially participate in land trusts, thereby preserving the desired space and enjoying the tax benefits. Landowners and land trusts should be conscious of the proper use of federal income tax deductions for both land and conservation easements. They should also seek counsel from a professional tax advisor to make sure donations are within the letter of the law.
#6 Understand your health care plan options.
For many American workers at mid-size and large employers, fall is the open enrollment period for selecting their employee health benefits for the coming year. People may wish to consider enrolling in a high deductible health plan paired with a health savings account. Contributions to an HSA are tax-deductible and grow income tax-free. HSA funds can go toward paying for eligible health care expenses or be saved for future health care expenses, including long-term care. The maximum 2019 HSA contributions are $3,500 for an individual employee and $7,000 for an employee plus a spouse or domestic partner, an employee plus children, or a full family. There are no “use it or lose it” concerns with HSAs.
With potentially large sums of money at stake, it is advisable to consult a professional tax advisor before making any decisions related to taxes.
This Article Originally appeared on: https://www.forbes.com/sites/impactpartners/2018/12/13/6-savvy-year-end-tax-moves-to-make-now/#4adc50af4393