Two certain things in life are death and taxes. And even though much can change in the tax system, the IRS will always be there to take their portion of your income. Much indeed has changed since the 2017 Tax Cuts and Jobs Act. Many Americans this year are seeing less of a tax refund or more of a liability than they were expecting because their employers withheld less taxes on their pay-stubs last year. In an effort to reduce your tax liability, you’ll always want to take advantage of the following tax breaks and strategies. I will outline the easiest, most common strategies first and then provide more complex strategies.
- Contribute to a qualified retirement plan. When you contribute to an employer plan, or if you’re self-employed a SIMPLE or SEP IRA, you can deduct these contributions from your taxable income. Under current tax code you can contribute up to $19,000 to a 401(k) or 403(b), $13,000 to a SIMPLE IRA, and $6,000 to a Traditional IRA or Roth IRA. You can still make contributions to your plan to count for last year as long as you do it before you file your return.
- Harvest losses to offset gains. If you have some investments that are winners and some that are losers, now might be a good time to harvest some losses to offset some gains. While it may be too late for this year’s return, the month of December is always a great time to get out of a bad investment to harvest those losses and thus decrease your tax liability for those great gains you’ve got in your other investments.
- Take advantage of the available deductions and credits. The standard deduction was increased last year to $12,000 for individuals and $24,000 for those married filing jointly. There are a plethora of tax credits you can take advantage of ranging from the Child Tax Credit to the American Opportunity Credit/Lifetime Learning Credit for those in college or post-grad, and business tax credits. A credit of $13,810 is available for those who have incurred qualified expenses in the process of adoption. If you have income from investments in foreign countries than you can take advantage of the foreign tax credit so that you don’t pay taxes abroad and at home on the same investments. There are many other credits you can take advantage of. Knowing your situation and how it corresponds with the credits in the tax law can help reduce your tax liability tremendously.
- Bundle your deductions. Since the standard deduction is so high now, 90% of Americans are finding it more advantageous to simply take it instead of itemizing their deductions. This essentially erases the advantage of itemizing your health costs, charitable contributions, SALT (state and local taxes), mortgage interest and points, investment interest, casualty and theft losses, and gambling losses. For instance, if George and Susan gave $5,000 to their church, paid $4,000 in mortgage interest, and had $6,000 worth of medical costs last year, that sum of $15,000 is nowhere near their standard deduction of $24,000 so they’re better off taking the standard deduction. However, if they knew they were going to give $10,000 to charity the following year and George decided to undergo a necessary medical procedure a little earlier, they could go ahead and contribute the extra $10,000 this year and do the $4,000 procedure. This would make their total itemized deductions equal $29,000 which is greater than the standard deduction so they could itemize this year and take the standard deduction the following year. They were going to give the money and do the procedure anyways so now the tax liabilities for both years have been significantly minimized.
- Gift your RMD’s (Required Minimum Distributions) as QCD’s (Qualified Charitable Distributions). If you’re age 70 ½ or older, you’re required to take money out of your retirement account (unless it’s a Roth IRA). You may also be giving to charity. Instead of taking the money out and being taxed on it and then giving it to charity, you can give it directly to the charity of your choice from your retirement account tax-free. If you’re in a 22% tax bracket, then every dollar you give to charity is only costing you $.78. The charity wins and you win!
- If you find some of these areas to confusing to figure out alone, work with a tax professional or financial adviser such as Maynard and me at American Financial Planning. We’d be happy to look at your situation for free and offer advice on next steps you can take to minimize your tax liabilities both now and in the coming years.