Don't let tax turkeys gobble up your money. Make these tax moves, a couple of which are related to recent tax reform, this November and for sure by the end of 2018.
South Park turkeys via Giphy
It's November! The start of the holiday season. Time to get into the festive spirit with some year-end tax moves.
"Whoa! Wait! What the what are you thinking?" you say. "I'm still adjusting to Standard Time and already have a huge to-do list to make sure my family has the perfect Thanksgiving. Then as soon as that's over, I've got to start with the plans for December's merriment."
I hear you.
But I also know you need to add taxes to the mix. Now. Before you get all involved in Turkey Day and Christmas or Hanukkah or Mawlid an Nabi or whatever holy day your faith follows these last two months of the year.
If you don't, all the other important non-tax stuff that demands your attention as the year winds down will suck up all your time and you'll miss out taking some tax-smart tax actions.
And several tax moves to make before 2018 ends are especially important because of changes under the Tax Cuts and Jobs Act (TCJA).
To help you get through your year-end tax revelries (we do revel in taxes, don't we?) quickly so you can turn your attention to those other celebrations, here are 10 tax things to consider and, where applicable, complete ASAP.
1. Fine tune your Form W-4.
The TCJA changed tax rates and the income amounts taxed under them. If you haven't used the Internal Revenue Service's withholding calculator to do a paycheck checkup, then you're still relying on old tax law when it comes to the taxes taken out each pay period. That could mean you might encounter an unexpectedly large refund or tax bill. While the big refund isn't awful, it's still not ideal. You could have been using that money throughout the year. But a big tax bill is awful. So find out where you stand withholding wise and make and adjustments via a new W-4 ASAP.
2. Examine itemized expenses.
With the new tax law's substantially larger standard deduction amounts, more folks will find that itemizing is no longer worth it. However, in some cases, it's still worth it to keep track of your tax-deductible expenses. That's the case, for example, for individuals who have unusually large medical costs. For 2018, the itemizing threshold for medical costs is still 7.5 percent of your adjusted gross income. It could be worth bunching as much as those health-related costs into this year to exceed the standard deduction and then claiming the standard amount is 2019, or vice versa.
3. Pay attention to passthrough issues.
If you're a small business owner who's eligible for the TCJA's new Section 199A 20 percent deduction for passthrough entities. This is one of the most convoluted, confusing portions of the new tax law. Heck, the IRS is still deciphering its many permutations nearly a year after it was enacted. In addition to determining just how much the small business tax break can provide, you need to ensure your company qualifies and whether you need to make any changes to your compensation structure to maximize the tax break. So if you don't have a tax professional to guide you through this new tax break, hire one now.
4. Clean out your FSA.
A medical flexible spending account (FSA) offers a great way to set aside pre-tax dollars you can spend on health care costs not covered by your insurance policy. But they have one big drawback. Many still require you to use up all of your FSA money by the end of the benefits year, which is Dec. 31 for most companies, or lose them. Some companies give FSA owners a grace period until March 15 to use the money. Others allow a rollover of at least some of the accounts' funds. But your best bet is to spend down your FSA completely to ensure that it's not wasted.
5. Pad your nest eggs.
Add as much as you can to your retirement accounts by year's end. This is a perennial suggestion, as far too many taxpayers fail to make the most of their 401(k)s and other savings accounts. Yes, you do have until next April 15 to make IRA contributions, either traditional or Roth, for 2018. But the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. And if your traditional IRA is deductible, that will reduce your taxable income for the year.
When it comes to workplace retirement plans, Dec. 31 is the last day you can put money for the current tax year into your 401(k) or similar plan. So get to your benefits office now to bump up your contributions for the final pay periods of the year. This post on 2018 and 2019 inflation adjustments for retirement plans has specifics on how much you can put into your nest eggs this year (and next).
6. Harvest your investment tax losses.
For a while, it seemed like stocks could only go up. Then came February. And March. And October, which was brutal, with stock funds falling an average of 7.9 percent and wiping out all year-to-date gains.
Dow Jones Industrial Average index from October 2016 to October 2018 Find more statistics at Statista
Few of us escaped these 2018 market dives unscathed. But not all is lost. It might be a good idea, as part of your overall portfolio analysis, to sell some of the assets that didn't rebound. You can use those losses to offset any gains you made on other sales this year.
While it's hard sometimes to admit you made a bad investment decision, there's a school of financial thought that you should realize your losses sooner rather than later. Investors who wait until the very end of the tax year are likely to pay more taxes than those who realize losses when they occur, says , says Mier Dr. Statman, the Glenn Klimek professor of finance at Santa Clara University's Leavey School of Business. If you wait until December, says Statman, the share prices might increase to what you paid for them, or more, and the opportunity for a tax deduction would disappear.
Capital losses also could be especially beneficial to higher income taxpayers facing the 3.8 percent Net Investment Income Tax (NIIT). This surtax, part of the Affordable Care Act, is still in the tax code. It applies to the unearned income of single (or head of household) filers with modified adjusted gross incomes (MAGIs) of more than $200,000 and married joint filers earning $250,000 (or $125,000 if married and filing separately). Harvesting losses can help these high earners reduce their NIIT amount.
And if in taking those losses you discover you have more of them than gains, you can claim up to $3,000 in bad investments against your ordinary income to help lower that taxable amount. Then get a new financial adviser!
7. Be charitable.
During the traditional gift-giving season, many folks make giving to charities part of their holiday celebrations. In addition to making you feel good, such contributions are still deductible under the new tax law.
The most common ways of giving to an IRS-approved nonprofit is by writing a check or charging your donation to your credit card. You also can donate clothing or household items and deduct the value of your old property.
There also are other more creative ways to give. Donate appreciate stock that, in your portfolio evaluation, you decided no longer fit your overall investing plan.
If you're age 70½ and are facing a required minimum distribution (RMD) that could push you into a higher tax bracket, consider directly transferring that RMD amount (up to $100,000) to your charity of choice. It allows you to meet the withdrawal rule without having to pay tax on the amount. And while an RMD direct donation means no charitable tax deduction, avoiding a chunk of taxable income is a pretty darn good tax break.
8. Collect your cryptocurrency documents.
You'll need this paper trail if you buy, sell or mine cryptocurrency for an accurate record of what you owe on this property. And yes, that's how the IRS views Bitcoin and its digital brethren. If you don't have complete and correct records of your transactions, you could be subject to added attention from the IRS and possibly face a bigger tax bill that you expected.
9. Bump your bonus into 2019.
The new tax law lowered rates and expanded income brackets so most folks will see more of their earnings taxed at lower levels. But if you're near the top of a bracket and an expected end-of-year bonus could push you into higher tax territory, talk to your boss about postponing that reward until 2019. Sure, delaying receipt of that added money might cut into your holiday spending budget. But it could save you taxes and provide the cash early next year to pay the credit cards you used to buy gifts.
If you're self-employed, either as your full-time job or from side gigs, you have more control on cash flow. Don't send out job invoices until late December so that you won't get those payments until 2019.
10. Deal with your divorce.
Ending a marriage is rarely pleasant. Things get even messier when taxes are involved in the nuptial's dissolution. A TCJA provision that kicks in next year adds some end-of-2018 urgency and yet another tax matter over which couples can fight.
If you will be paying alimony, you'll want to finalize the split before the end of 2018 so you'll be able to, under prior tax law, deduct those payments to your soon-to-be ex-spouse. The TCJA changed the rules here and if the divorce decree comes after Dec. 31, 2018, then that alimony won't be deductible.
If, however, you're the ex who will be getting spousal support payments, you'll want to delay the decree. The TCJA says that instead of owing tax on alimony as was the case before the new law was enacted, starting in 2019 alimony will be tax-free.
More November tax moves: And that wraps the 10 tax moves to make by Dec. 31.
Yeah, that's a lot to shoehorn into the end of the year. But if any or all of them apply to your financial and tax situations, check into them. They could make a valuable difference when you file your taxes next year, or before!
If, however, you're a tax glutton, you can find even more tax moves specifically for November over in the ol' blog's right column. They're under the bright red November Tax Moves heading, just below the countdown clock ticking off the time left here in tax year 2018.
Once all this tax stuff is done, you still have plenty of time to work on your holiday celebrations. And you'll be able to do without that nagging tax voice in your head.