Always plan ahead. As the saying goes: “It wasn’t raining when Noah built the ark.” Tax planning isn’t the way most people want to spend their free time during the holidays. However, planning now can…
Always plan ahead. As the saying goes: “It wasn’t raining when Noah built the ark.”
Tax planning isn’t the way most people want to spend their free time during the holidays. However, planning now can save money in the long run. Here are five things to do before the end of the year to cut your 2018 tax bill.
— Make energy-saving improvements to your home.
— Manage capital gains and losses.
— Consider an RMD-to-charity rollover.
— Understand the new tax law and how it relates to taking deductions.
Taxpayers who make energy-saving improvements to a U.S.-based primary residence may be able to take a credit to offset the cost of repairs if the work is completed in 2018. These improvements include adding qualified upgrades to power systems in your home to include solar power, wind energy and geothermal heat pumps.
Manage Capital Gains and Losses
Gains and losses from the sale of capital assets such as stocks, bonds and property are realized in the year they occur. Therefore, taxpayers with assets that have gone down in value can sell them in 2018 and recognize all or part of the loss in the current tax year. Capital losses are limited to a net of $3,000 per year, so they can be used to offset capital gains from the current year, and the unused portion can be carried forward and used in future tax years. For example, a taxpayer with $10,000 in capital losses can take a $3,000 loss on this year’s return and carry $7,000 forward to future years. If that same taxpayer had $5,000 in capital gains, he would take $8,000 in losses and carry the remaining $2,000 forward.
A great strategy for those who qualify is the RMD-to-charity rollover or qualified charitable distribution. Taxpayers age 70½ and older with tax-deferred retirement accounts such as IRAs must take taxable required minimum distributions, commonly called RMDs, from the account each year. If the taxpayer doesn’t need the money and doesn’t want to pay the tax on the distribution, she can have the RMD distributed directly to a qualified organization and avoid the tax bill. With the new, higher standard deduction for 2018 (read more on this below), this strategy is expected to be more popular in 2018 than in previous years.
Understand the New Tax Law and How It Relates to Taking Deductions
Thanks to the new Tax Cuts and Jobs Act, fewer taxpayers are expected to itemize their deductions in 2018 than in prior years, as most taxpayers are now expected to take the newly raised standard deduction, which is $12,000 for single taxpayers, $18,000 for heads of household and $24,000 for married taxpayers filing jointly. That means many taxpayers will no longer benefit from writing off their medical bills, property taxes and charitable contributions as they have in the past. Taxpayers who do expect to itemize should make payments in 2018 for expenses they plan to deduct this year. In addition, the new tax law also removed the Pease limitation, which prevented higher income taxpayers from taking the full benefit of their itemized deductions, so those taxpayers with large deductions may now derive a greater benefit from itemizing.
Talk to Your Tax Preparer
The single best move anyone can take before the end of the year to cut their 2018 tax bill is to consult a licensed tax professional and seek advice for their specific situation. Waiting until January will be too late. Each taxpayer’s situation and each tax year is unique. This year, there are new laws and new forms that will affect everyone. Waiting until the return is calculated is likely to produce a few surprises. The new tax law also changed the way employers withhold taxes, and the IRS is concerned that many taxpayers will be surprised by their refunds or balance due because of the new withholding rules.
Remember that not all tax preparers are created equal. Enrolled agents are licensed by the U.S. Treasury while certified public accountants and attorneys are licensed by their respective states. A few states now license their own tax professionals as well. To check the credentials of your tax pro, use the IRS directory of tax preparers.