Reduce your tax liability and more end-of-year moves
Before you get sucked into the holiday hoopla, it’s time for another annual tradition: year-end money moves. While this year could be different for you because of the Tax Cuts and Jobs Act, some advice holds up regardless of whether your income tax bracket is higher or lower than it was last year.
Standard deduction does not mean do nothing:
If you are among the near 90 percent of taxpayers who are expected to claim the standard deduction in 2018 due to expanded limits ($12,000 for individuals, $24,000 for married filing jointly and
$18,000 for head of household), you may think that there is nothing you should do. Not so.
The best way to reduce your tax liability for the calendar year is to maximize your retirement plan contributions. If your cash flow allows, contact your HR department to see if you can increase your contributions before the end of the year.
If you are self-employed or have made some extra money from a part time job or as a contractor, you may want to establish your own retirement plan. Most, with the exception of a SEP-IRA, must be established (though not funded) by Dec. 31.
Another change that may occur from the switch to the standard deduction is that you will no longer receive a deduction for your charitable contributions. One way to take advantage of the new law is to give larger, lump-sum gifts, which represent present and future contributions. This “bundling” or “bunching” of charitable gifts could bring you back into the itemized category, helping you do good, while also recapturing the tax benefit.
Be charitable:
If you itemize and have a taxable investment account, use the multi-year bull market to your advantage. You can gift highly appreciated securities to qualified charities and by doing so, write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains.
Use the bull:
You can still sell investments with losses in taxable accounts, which can be used to offset gains during the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years.
Take required minimum distributions: You must withdraw money from retirement accounts after you turn 70½, unless you are still working. Failure to do so results in a 50 percent penalty on the amount you should have taken. If you have multiple IRAs, you only need to take one RMD based on your age and the total value of the accounts. But, if you also have a 401(k) or 403(b), you need to take the RMD from each account individually. (Consult IRS.gov for more specifics.)
If you don’t need your RMD, then consider a qualified charitable distribution, which allows you to direct some or all of your RMD to the charity of your choice. You don’t get to count a QCD toward your charitable deduction, but you avoid being taxed on the money.
Tax advantage of the gift tax exclusion: You can give up to $15,000 ($30,000 with a spouse) to as many people as you wish in 2018, free of gift or estate tax. You may want to use the money to fund 529 education accounts.
Embrace the losers:
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com.