Six Year-End Tax Tips from Mahoney Asset Management and Rockland Pro
Max out contributions into tax-deferred retirement accounts
Whilst saving more funds for retirement you could potentially reduce your income enough to fall into a lower tax bracket. The limit on employee contributions to 401k, 403b, or 457 plans are $18,500 for 2018 and will increase by $500 to $19,000 for 2019. Employers will also match your contributions up to a certain point, and with the contribution deadline scheduled for Dec. 31st be sure to deposit prior to year-end to get a deduction on your next tax bill.
If neither you nor your spouse participates in a workplace retirement plan, you can contribute $5,500 ($6,500 if you’re 50 or older) to an IRA and minimize your taxable income, even if you don’t itemize deductions. Make sure to max out these contributions to max out savings!
If you’re self-employed, consider contributing to one of several retirement plans. For example, you can contribute as much as 25% of your net earnings from self-employment, up to $55,000 for 2018 ($56,000 for 2019), to a Simplified Employee Pension (SEP). Similar to 401k plans offered by employers allow you to contribute up to $18,500 for 2018 ($19,000 for 2019) to a “Solo-401k” plan.
Sell your investments strategically
Gains on an investment held for longer than a year before selling it at a profit is classified as long-term capital gains. Anything shorter than a year and the profit is registered as short-term capital gains. The reason behind holding onto the investment for longer is that short term gains are taxed as normal income, while long term gains tax is maxed out at 20%. For example, a $2000 investment gain, taxed at your effective rate of say 25% will cost $500 to the IRS. If you hold onto the investment for longer than a year before selling it, you’ll pay a maximum of $400, saving you $100 on just one investment.
Also consider unloading investments with losses that are not performing well. You can deduct the losses on these investments to offset any taxable gains realized during the year, plus up to $3,000 of other income. Any excess losses over $3,000 will carry over year-after-year.
Take out your required minimum distribution (RMD) amount
An RMD is the minimum amount of money the IRS requires you to withdraw from certain tax-advantaged accounts each year after you reach a certain age. The recent tax changes did not affect RMDs, but you still must withdraw it in accordance to IRS regulations by Dec. 31st, otherwise you could face a big penalty fine. This applies to any individual 70.5 or older going into 2018, the date by which you must take your required minimum distribution.
If you work from home make sure to utilize the home office tax deduction
With loosened eligibility guidelines to claim a home office deduction, self-employed filers must ensure they take advantage of this tax break. If you currently have no fixed location for your business, complete regular and exclusive use of your work at home or use your home as the principal place of business, you are eligible. The deductible amount is a percentage of the costs that are based on the square footage of your office compared to the total area of the house.
Alternatively, tax payers can use the simplified method, which is based on a standard deduction of $5 per square foot of home used for business, with a maximum of 300 square feet allotted to each home. To add to this, there is no home depreciation deduction or later recapture of depreciation for the years if the simplified option is used. If you are uncertain about the method to use, we recommend consulting a certified public accountant.
Bunch your charitable donations.
Charitable donations are only deductible as an itemized deduction. Therefore, taxpayers will need a combined itemize expense to be greater than their standard deduction, that is $12,000 for an individual and $24,000 for married filers.
The idea of ‘bunching’ charitable donations allows a taxpayer to do a few things. These include itemizing for just one year, donate more money to their favorite charities, as well as maximizing their financial savings through this tax break.
Contribute to a 529 Plan
529 plans were traditionally used by tax payers as one way to save for college education. Similar to Roth IRA’s, contributions are paid with after-tax dollars and the investments accumulate on a tax-free basis. Under the current tax law passed in December 2017, withdrawals can now be used for “qualified higher education expenses”, which may include private elementary and high schools.
Although 529 Plan contributions are not tax-deductible on your federal income tax return, benefits may vary from state-to-state. For example, a resident of New York State may be able to deduct up to $5,000 ($10,000 married filing jointly) of your New York State 529 plan contributions on your New York State income tax return.
Investor, author of 7 books including Life On Your Terms, and licensed financial advisor for more than 27 years, Ken Mahoney is the CEO of Mahoney Asset Management. To get a free copy of the e-book, call 845-371-0101 or email ben@mahoneygps.com
Rockland Pros is an accounting and consulting firm that assists clients who face challenges with finance, business processes, technology, and compliance requirements.