10 smart end-of-year tax moves

December 13, 2018 11:27 PM

Even if your clients didn’t owe money last tax season, it’s more important than ever for them to start planning for the upcoming tax season now due to tax reform changes. Here are tips for end-of-year planning to help maximize their refunds from Intuit senior tax analyst Mike D’Avolio.

With reduced tax rates due to tax reform, clients may be seeing more money in their paycheck – and they can reduce their taxable income or tax liability by the end of the year with some of the following strategies.

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Maxing out their retirement

• Taxpayers have until Dec. 31 to max out their 401(k) to $18,500 (or $24,500 for those 50 and over) and reduce their taxable income.
• If they are self-employed, they can contribute up to $55,000 into a SEP IRA for 2018.
• They have until the tax filing deadline to contribute up to $5,500 to their IRA ($6,500 for those 50 and over) and get a tax deduction for their contribution.
• They may even get a Saver’s Credit of up to $1,000 ($2,000 for those who are married filing jointly) for contributing to their retirement.

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Donating appreciated stock

• They can supercharge the tax benefits of their generosity by donating appreciated stock or property, rather than cash.
• If they have owned the asset for more than one year, they get a double tax benefit from the donation: They can deduct the property’s market value on the date of the gift, and they avoid paying capital gains tax on the built-up appreciation.
• They must have a receipt to back up any contribution, regardless of the amount for a stock transaction.

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Paying for college courses in advance

• If they’ve been putting off that class to boost their career, they can pay for college courses for the first quarter of next year by Dec. 31 and possibly be able to get the Lifetime Learning Credit of up to $2,000 per return.
• If they have a college student in their family, they may also be able to pay the student’s first-quarter 2019 college courses by Dec. 31 and may be able to get the American Opportunity Tax Credit up to $2,500 for the first four years of college.
• Also, don’t forget about the student loan interest deduction of up to $2,500 if they are paying on student loans.

Selling loser investments to offset gains

This key year-end strategy is called “loss harvesting” — selling investments such as stocks and mutual funds to realize losses. They can then use those losses to offset any taxable gains they have realized during the year – losses offset gains dollar for dollar.

If their losses are more than their gains, they can use up to $3,000 of excess loss to wipe out other income. If they have more than $3,000 in excess loss, it can be carried over to the next year.

Deferring income

It’s tough for employees to postpone wage and salary income, but they may be able to defer a year-end bonus into next year—as long as it is standard practice in their company to pay year-end bonuses the following year.

If they are self-employed or do freelance or consulting work, they have more leeway. Delaying billings until late December, for example, can ensure that they won’t receive payment until the next year.

Of course, it only makes sense to defer income if the taxpayer thinks they will be in the same or a lower tax bracket next year. They don’t want to be hit with a bigger tax bill next year if additional income could push them into a higher tax bracket. If that’s likely, they may want to accelerate income into 2018, so they can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.

Watching flexible spending accounts

Flexible spending accounts are fringe benefits that many companies offer that let employees steer part of their pay into a special account that can then be tapped to pay childcare or medical bills.

The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious “use it or lose it” rule. The taxpayer has to decide at the beginning of the year how much to contribute to the plan and, if they don’t use it all by the end of the year, they may forfeit the excess.

With year-end approaching, clients should check to see if their employer has adopted a grace period permitted by the IRS, allowing employees to spend 2018 set-aside money as late as March 15, 2019. If not, they can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in their account.

Tax reform and itemizing

With the almost doubling of the standard deduction under the Tax Cuts and Jobs Act, taxpayers who once itemized and were also able to take additional itemized deductions such as charitable contributions may now have to take the standard deduction, but if their tax deductions are right at the max ($12,000 for single taxpayers and $24,000 for those who are married filing jointly), they can make smart moves before the end of the year:

• Donate more to charity to push themselves over the new standard deduction amount and maximize their deductions.
• Use donor-advised funds for charitable donations. An alternative to bunching donations, cleints can set up these funds and recommend how to distribute money from the fund to their favorite charity.
• Bunch their itemized deductions. Watch deductible expenses like medical expenses that are deductible at expenses over 7.5 percent of your adjusted gross income for 2018. If their medical expenses are getting close to the threshold but not quite there, they can make those doctor visits they’ve been putting off.

Eliminated deductions No. 1: Moving expenses.

Expenses a client paid for moving for their job were tax-deductible, but under the new tax law it is no longer tax-deductible unless they are active-duty military. They should negotiate a moving reimbursement with their employer, and also remember that they can deduct mortgage interest and property taxes (property taxes, state income, and state and local sales tax capped at $10,000 in aggregate).

Eliminated deductions No. 2: Dependent exemption

The dependent exemption of $4,050 is eliminated, but they shouldn’t forget that they can send their kids to camp over the holidays if they have to work and get a Child and Dependent Care Credit up to $1,050 for one child and up to $2,100 for two or more kids. Also, remember that the Child Tax Credit doubled and is now $2,000 per dependent under 17.