Year-End Tax Planning

Daryl Dagit - Savant Capital Management

Tax planning is a concept that involves projecting before-tax income and implementing strategies to minimize the taxable portion of that income. On December 22, 2017, a new federal tax code (Tax Cuts and Jobs Act, or TCJA) was signed into law, with most of the changes going into effect on January 1, 2018. There are changes that may surprise you on April 15, 2019 if you have not completed some tax planning. As Morgan Stanley once proclaimed, “You must pay taxes. But there’s no law that says you gotta leave a tip.”

As we come to the end of another year, there is always a rush to take advantage of strategies to help minimize taxes. Here are a few tax planning tips that could potentially lower your taxable income and therefore lower your total tax bill.

Retirement savings. In 2018, individuals with an employer-sponsored retirement plan can deduct contributions up to $18,500 ($24,500 if age 50 and over). One strategy is to max out your pre-tax employer sponsored plan and/or a traditional IRA. Make sure you take full advantage of any employer matching contributions. You have until April 15, 2019 to fund your IRA contribution for the 2018 tax year. Use some or all of your refund to fund your 2018 IRA contribution. 

Health insurance. During this time of year, many will have the ability to change their options to take advantage of a flexible spending account (FSA) or health savings account (HSA). Both account types allow individuals to save on a pre-tax basis for current and future health costs. FSAs allow individuals to save up to $2,650 on a pre-tax basis in 2018. HSAs allow for $3,450 in pre-tax savings for an individual and $6,900 for those married filing jointly. (There is a $1,000 HSA catch-up for those ages 55 or older.) Keep in mind the HSA is the only account that offers a federal tax break for funding it and tax-free use of the funds, including investment earnings, for qualified medical expenses.

Dependent care account. Like the healthcare FSA, you have the ability to defer up to $2,500 ($5,000 for a married couple) to a dependent care FSA, which reimburses employees for qualifying expenses relating to the care of eligible individuals. This includes day care, nursery school, day camp, babysitters, before/after school programs and caregiver expenses for disabled individuals who live with you.

Investment income. If you have taxable investment accounts, you may want to review your year-to-date capital gains or losses. It may be beneficial to postpone or take capital gains, depending on your current income situation. If your taxable income falls below $38,600 ($77,200 married), capital gains will not be taxed at the federal level. Taxable income at or above $38,600 ($77,200 married) but below $239,500 ($452,400 married) will receive a favorable tax rate of only 15 percent. Plan ahead! If income is expected to be lower next year, wait to take capital gains from the sale of investments. Be aware of mutual funds that may pay out large capital gains in December. Check with your advisor in late November or early December to see if any of your funds are subject to this payout.

Itemized deductions. This is an area that experienced a big change with the new tax law. Itemized deductions such as state income taxes paid, real estate taxes, mortgage interest, charitable contributions and medical expenses can make a significant dent in taxable income. In 2018, the standard deduction jumps to $12,000 ($24,000 married) and if you are blind or over age 65, you can add an additional $1,300. As a tax filer, you are allowed the greater of your itemized deductions or the standard deduction. Before you run to the bank, keep in mind there is a limit on the state and local tax (SALT) deductions of $10,000. For example, if your property taxes equal or exceed $10,000, you cannot itemize state tax deductions, including income tax and sales tax. 

Review your 2017 return for itemized deductions and see if you will be able to itemize under the new tax code. Then review your federal tax withholding for 2018, as it was reduced in February, and make sure there are no surprises. Keep in mind the tax brackets were changed, along with the marginal tax rate for each bracket.

Be philanthropic and keep track of your cash and non-cash donations. Have a significant income year? Consider front-loading a donor advised fund (DAF), which allows you to take a charitable deduction in the current year while spreading out the payments to qualified charities over several years. You can also mail or charge a donation on December 31st, make your January house payment before December 31st, and pay your January quarterly tax payment early.

These are just a few ideas that may help you as we approach the end of the year for tax planning. Albert Einstein once stated, “The hardest thing in the world to understand is the income tax.” So don’t feel bad if you are having trouble understanding all the ways to avoid leaving the government a tip. As always, consult your tax professional to determine what’s best for your unique situation. iBi

Daryl Dagit is the market manager and financial advisor in the Peoria office of Savant Capital Management. He can be reached at (309) 693-0300. 

This is intended for informational purposes only and should not be construed as personalized tax or investment advice. Please consult your tax and investment professional(s) regarding your specific circumstances.

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