While your financial planning and wellness is an ongoing process, certain times of the year represent smart times to plan. As the year winds down and the calendar year closes out, consider kicking your financial planning up a notch by taking advantage of some strategic end-of-year planning strategies. If you don’t act by the end of the year, you will lose out and end up paying more in taxes than necessary. Make the end of 2018 count and see if any of these smart tax moves could help you out.
- Make Gifts
While making gifts to others might not seem like the best way to get your finances in order, when done correctly it can help improve your financial situation, reduce your tax burden, and still allow you to benefit others. First, consider taking advantage of the annual gift tax exclusion of $15,000 (up to $30,000 for couples who gift split). This allows you to gift property to an individual of up to $15,000 a year without it being treated as a taxable gift. You can give up to $15,000 to each person, without it being treated as a taxable gift. Most people don’t have to worry about federal estate taxes because their taxable estate and gifts will fall well below the threshold, which is roughly $11.18 million per person in 2018. If your estate will potentially be subject to the estate tax at death, however, make sure you take advantage of this annual gifting strategy.
The Tax Cuts and Jobs Act passed on December 22, 2017, removed a number of personal deductions and expanded the standard deduction amount. As a result, many people not be able to itemize in 2018, reducing the number of people who will deduct charitable contributions from their taxes. One strategy available is to “bunch” contributions in the current year. This means that you give several years’ worth of contributions to a charity, say, perhaps the total you had planned to give over the next five years, all at once in 2018. This could increase your itemized deductions to a level high enough to qualify for the charitable deduction. If you don’t want the charity to receive all the money this year, a donor-advised fund could be a way to make the entire gift this year, deduct it, and still have the money spread out to the charity over a number of years. However, if you plan on “bunching” a number of charitable contributions this year to take advantage of itemizing your deductions, make sure you do a quick tax calculation to ensure that your itemized expenses will reach the deductible level.
- Engage in Tax Loss Harvesting
Next, consider selling some of your stock investments that have suffered losses this year. Since the market as a whole has been fairly flat over the past 12 months, you probably have some investments that are up and some that are down. Tax loss harvesting is the process of selling those investments that have experienced a loss in the year, which allows you to realize the loss. By realizing (or harvesting) the loss, you can offset some capital gains for the year. However, even if you don’t have any gains or if your capital losses exceed your gains for the year, you can still use up to $3,000 a year to offset ordinary income to reduce your taxes. Lastly, if you sell a stock in order to realize losses you cannot buy a substantially identical stock within 30 days. The IRS treats that as a “wash-sale” and disallows the realization of the loss. Tax loss harvesting allows you to reduce your taxes by realizing gains in order to offset losses or reduce ordinary income.
- Take Advantage of HSA and Retirement Accounts
Consider setting aside money for your retirement by the end of the year. While you can still contribute to HSAs and IRAs after the year end, you should start planning for it now by earmarking the money as a first step. In 2018, you can contribute up to $5,500 into an IRA as an individual as long as you have earned income of at least $5,500 and are under age 70.5. If you are over age 50, you can contribute an additional $1,000 into the account. Whether your contribution is deductible or not is dependent on your status as an active participant in a qualified plan, on your adjusted gross income, and on your