4 Tax Tips to End the Year With a Bang

As the year comes to a close, and you’re busy rushing around to get those final presents for the ones you love, here are a few quick, last-minute strategies for cutting your tax bill on April 15.

1. “Take a small example, take a tip from me. Take all your money, give it all to charity.”

Unlike the Sublime song, What I Got, I’m not advocating giving all your money to charity at year-end. But, if you itemize your deductions, charitable contributions are one of the areas you can boost at year-end that may have an big impact come tax time. A caveat of this planning tool is that the Trump Tax Cuts of 2017 (in effect for the 2018 Tax Year) made big changes to the Standard Deduction and will reduce the number of Americans who will qualify to Itemize their Deductions. However, you may want to look into “Bunching” to take full advantage of the tax law changes.

What changes brought about by the Trump Tax Cuts of 2017 will impact most people?

The Trump Tax Cuts of 2017 not only increased the Standard Deduction, but also made some significant changes to Schedule A (Itemized Deductions).

They eliminated Miscellaneous 2% Deductions (think unreimbursed employee business expenses, investment management or tax preparation fees, and union dues), put a $10,000 cap on state, local, real estate and property tax deductions, limited the mortgage balance allowed to take the mortgage interest deduction and limited the deductibility of home equity loans or lines of credit unless that money was used to improve your home.

What is “Bunching”?

“Bunching” is a term to describe either pulling ahead deductions to the current year or pushing out your deductions into later years.

With the changes to Schedule A, most Americans will not qualify to Itemize given the new, higher Standard Deduction. That doesn’t mean that they can’t make some adjustments to qualify every once in a while.

That’s where “Bunching” comes in.

Maybe you’re a charitably-inclined Married Filing Jointly couple. You usually give $10,000 or so each year to charities. You’ve got mortgage interest of $5,000, and state, local and property taxes totaling $8,000 each year. Those 3 pieces of Schedule A only total $23,000, so you’ll take the $24,000 Standard Deduction.

What if I told you that instead of donating $10,000 in 2018, you pull $5,000 of what you’d normally donate in 2019 into 2018? Well, your Itemized Deductions now amount to $28,000 and you’re able to itemize. In 2019, you’ll just donate the remaining $5,000 to charities and claim the $24,000 Standard Deduction. In 2020, you’ll donate a bit more again to boost your Itemized Deduction amount and so on.

Donor Advised Funds

I know what you’re saying. I really don’t want the charities to receive a big donation from me in 2018 and then get less from me in 2019. Well, there’s an account that you can utilize to take a charitable deduction and still retain control over where that money ultimately goes along with discretion over the timing of those distributions.

It’s called a Donor Advised Fund. A Donor Advised Fund allows you to donate appreciated securities (or cash), take a full deduction on your gift, and then have the ability to make “gift recommendations” to your favorite charities over time. Many also allow you to invest the account and possibly grow it for higher future gift recommendations. Since the tax deduction is taken when the securities or cash are gifted to the Donor Advised Fund, you won’t get an additional charitable deduction when a gift recommendation is fulfilled to your favorite charities. Some examples of DAFs are Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. There’s typically a minimum initial gift (most are $5,000 or more) required to establish the account and then you can make subsequent gifts of any amount.

2. Sell your losers

The markets have been choppy this fall and some investments that you hold in taxable accounts may have unrealized losses. If you have a taxable investment account, look through your account. It may be tax advantageous to sell some of your positions that are in a loss and capture the tax benefit. This is referred to as Tax Loss Harvesting and is a great strategy to utilize, just make sure you are very aware of the Wash-Sale Rules.

Capital losses are able to offset any capital gains (or capital gains distributions) you incur as well as offset up to $3,000 of ordinary income. Any losses over and above your capital gains and the $3,000 of ordinary income can be carried forward for use in future years. 

3. Open and contribute to an IRA

Luckily, you can open and contribute to an IRA up until the tax filing deadline (without extensions). For the 2018 tax year, the deadline is April 15, 2019.

As you may, or may not know, the “I” in IRA stands for “Individual”, meaning, each spouse can open and maintain a separate account. There are no “joint” IRAs.

If you’re a married couple making less than $101,000 ($63,000 if single) in 2018, each spouse could make a fully deductible contribution to a Traditional IRA of $5,500 (plus $1,000 “catch-up” if over age 50). Not only are you saving money toward your eventual retirement, but you’re also receiving a tax deduction for the amount of your contribution for the current year. Growth on your money within a Traditional IRA is tax-deferred. When you pull money out, all will be taxed as ordinary income.

Another option would be to open and fund a Roth IRA. If you’re a married couple making less than $186,000 ($118,000 if single) in 2018, each spouse can make a full contribution of $5,500 (plus $1,000 “catch-up” if over age 50) to a Roth IRA.

A Roth IRA differs from a Traditional IRA in that you do not get an upfront tax deduction for the amount in which you contribute. However, any growth on the account in the future is tax-free. This type of account is especially great for those who believe their tax rate now is lower than what they expect it to be in retirement. If nothing changes between now and 2025 when the individual aspects of the Trump Tax Cuts expire, tax rates will be higher going forward.

4. Check your Flexible Spending Accounts  

This tip isn’t going to help you reduce your taxes for this year, but it may help you from losing out on some of your savings from this year.

Healthcare Flexible Spending Accounts (HFSAs) are designed to be a way to stash money away for healthcare expenses during the year. The downside is the requirement of these accounts to be fully dispersed by the end of the year or you forfeit that money. The infamous “use it or lose it” provision.

Check your balance in your HFSA and if you still have money remaining, stock up on qualifying items prior to year end. Here’s a pretty good list from ADP of what does and does not qualify for HFSA reimbursement. Some employers allow a portion of the HFSA account to roll into the next year. Check with your employer for more details.

Focusing on a few of these tips prior to year-end may just put you in a better position come tax time.

About Chessie Advisors

Erik O. Klumpp, CFP® EA, believes that teachers, engineers, and young professionals should have access to objective, fee only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call.