There are simple actions you can take in December to reduce your tax hit in April.
Reduce your income – for now!
If you’re self-employed and expect your 2019 income and deductions to be about the same (or less than) 2018, delay billing clients until the end of December. Your clients will pay you next year and you won’t have to settle up with Uncle Sam, your governor and your local tax collector until 2020.
Use this same strategy for voluntary withdraws from retirement accounts. If you don’t need the money in December, wait before cashing in that IRA to pay for holiday gifts or a late winter cruise.
If you made a bundle selling Apple stock at its October high, sell off your losers before the end of December to reduce – or even eliminate – your capital gains.
Save for the future!
Contributing to a retirement account like the 401k at work, a spousal IRA, or a SEP for the self-employed can reduce your taxable income, but the IRS may also give you a tax credit of up to $2,000 for a single person and $4,000 for a married couple. That’s a straight-up reduction of how much you have to pay the IRS!
The credit phases out at incomes of $19,000 to $31,500 for single taxpayers and $38,000 to $63,000 for married taxpayers, but it’s worth checking to see if you qualify.
Many states allow you to exclude from income contributions to a 529 educational savings plan. In Pennsylvania you and your spouse can each deduct up to $15,000 a year per beneficiary, even if you aren’t related!
Pay the doctor or your favorite charity!
While fewer taxpayers will need to itemize deductions than before the Tax Cuts and Jobs Act (TCJA), for those who do, charitable contributions can still be deducted and it’s easier to deduct medical expenses.
You’re more likely to benefit from itemizing deductions if you have high medical expenses, are still paying off your mortgage, or you’re very charitable.
While you can’t deduct prepaid mortgage interest, you can deduct prepaid medical expenses. If you’re scheduled for major dental work in February, and you know your total medical expenses – from insurance premiums to mileage – will be more than 7.5% of your income, pay your dentist in December!For 2019 the medical expenses deduction threshold returns to 10% of income, so it’s easier to deduct medical expenses in 2018.
Charitable giving offers several unique opportunities to save on your taxes. Just remember to get a receipt!
Clean out the closets, the garage and the boat dock to increase your tax deduction.
Snap photos of your donations before dropping off your bags and boxes at Green Drop or putting them on your porch for Purple Heart, then make a list and assign values. Children’s shoes could be a $9 deduction, a man’s overcoat $62! Visit the Salvation Army’s web site for their excellent valuation guide and the photos serve as proof as to what you donated.
You can claim a deduction of at least $500 when you donate a car, boat, or airplane and if the value is between $500 and $5,000 you don’t need an appraisal.
Instead of donating cash, have your broker transfer appreciated stocks and bonds directly to your charity. You get a double benefit! (1) You don’t pay capital gains tax and (2) you get to deduct the full value of the donated property as a charitable contribution.
Donations from retirement accounts
Get the tax benefit of making charitable contributions even if you don’t itemize when you make a donation directly from your IRA! You can exclude from income up to $100,000 annually as a “qualified charitable distribution” when you contribute directly from a retirement account. Talk to your accountant to see if this makes sense for you and to your broker to handle the transaction.
The TCJA increased the maximum deduction for cash contributions to 60% of your income and unused contributions can be carried forward for five years.
Feedback is the breakfast of champions! Let me know if this was helpful or if you have any questions about how you can save on your 2018 and 2019 taxes. Click here or email me at Joanne@CPAHelpNow.com to contact me or to let me know what topics you’d like me to cover in the future.