November 26, 2018
Know how

Four year-end tax planning tips

John F. Shoro is the practice area leader for estate, financial & tax planning for Worcester law firm Bowditch & Dewey. Reach him at jshoro@bowditch.com.

Review your withholding

The Tax Cuts and Jobs Act passed in 2018 made several changes to the tax code, possibly making your ideal withholding amount somewhat different than previous years, not the least of which were changes to the tax brackets and thresholds for each bracket. While there are still a few pay periods left in the year, there is still time to increase or decrease your withholding to come as close to your ultimate tax liability as possible. There are a number of free online tax calculators you can use to estimate your tax liability. Run the numbers and adjust accordingly.

Maximize your retirement contributions

Saving for retirement is always good planning. Taking advantage of the maximum pre-tax contributions to a retirement plan is great planning. Contributions to retirement accounts can significantly reduce your taxable income. For 2018, you can defer as much as $18,500 of your salary into a qualified retirement plan such as a 401(k), and if you're over 50, you can defer up to $24,500.

If you don't have an employer-sponsored retirement plan, you can contribute (and deduct) as much as $5,500 to a traditional IRA if you are under age 50 and as much as $6,500 if you are 50 or older.

Harvest capital losses

Although long-term capital gains are taxed at more favorable rates than ordinary income, the tax can still significantly increase your tax bill. If you have taken this year some of the gains you have realized in your portfolio, you should consider reviewing the rest of your portfolio and selling any positions you are holding at a loss to offset those gains. Bear in mind, if you really want to hold the investment, you cannot simply sell it to take the loss and immediately buy it back. You have to wait more than 30 days before you can buy it back if you want to take the loss. You can replace the investment immediately with a similar investment, such as replacing an index fund from one fund family with a similar index fund from another fund family.

Think before you prepay deductions

A common tax planning strategy used to be to prepay certain deductible expenses such as real estate taxes or state income tax estimates before the end of the year to accelerate the deductions. The strategy still holds true for charitable contributions and medical expenses. In fact, taxpayers can deduct charitable contributions of as much as 60 percent of their income, up from the prior 50-percent cap. The threshold for the medical expense deduction has been reduced from 10 percent of adjusted gross income to 7.5 percent of AGI. The biggest change in deductions for individuals is the deduction for state and local taxes. Prior to the 2018 tax act, the amount you could deduct was unlimited. Under the new act, the maximum amount of state sales, excise, income and property taxes to be deducted is $10,000. Be mindful with the increase of the standard deduction (from $6,500 to $12,000 for and individual and form $13,000 to $24,000 for a married couple) many people will no longer have enough deductions to itemize. Prepaying deductions will only benefit a taxpayer who has deductions in excess of the standard deduction. Keep in mind the following deductions have been eliminated: Casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, tax preparation expenses, and moving expenses.

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