With the close of 2018, we begin to look ahead to 2019 and ensuring that we set ourselves up for a good tax outcome at year end. There are many things to consider as you move through the tax year and some require pre-planning to ensure maximum benefit.
The first thing to do is ensure that you are withholding enough from your paycheck or distributions or paying in enough through estimated tax payments. While you don’t need to pay your taxes due until April of the following year, it is important to get close to avoid penalties to the Internal Revenue Service. Be sure that you meet at least the safe harbor tests to avoid the penalties. These are: you end up owing less than $1,000 after your prepayments; you’ve paid in at least 90% of what you owe for the current tax year; and you’ve paid in at least 100% of what your owed for the prior tax year or 110% if your income is $150,000 (for 2018). With a paycheck, the withholding is taken out each pay period and deposited with the IRS, thus insuring that the taxes due on the income are deposited throughout the year. The same request can be made of distribution checks from retirement funds. For the self-employed, however, the vehicle becomes estimated tax payments, which are due once a quarter mid-April, June, September and January of the next year. These payments are generally calculated using your prior year’s figures. You should be sure to track your net income throughout the year to ensure that you are on target and do no need to make adjustments up or down in your payments. While the IRS won’t penalize you for not making enough prepayments to cover the increased tax liability, (provided you paid in at least the prior year’s liability and are not over the income limit), being hit with a large tax bill and additional current year estimated payment in mid-April can be tough.
If you are still working, a great tax advantage is contributing to a 401(k) or similar plan through your employer, if available. The limits for 2019, will be $19,000, with a $6,000 catch-up for those employees that are fifty or older, for a total of $25,000. There are tighter restrictions to those employees that qualify as highly compensated, in this case employees with a starting salary of $120,000 or more. You will need to contribute to your plan no later than December 31st of the year in which you want it counted.
For those that are over seventy and a half (70 ½) years of age, you are required to start taking required minimum distributions from your Individual Retirement Arrangement (IRA), as well as most company-sponsored retirement plans. The penalty for failure to take your required minimum distribution is a fifty percent penalty. The IRS does this by taking the amount of RMD you should have taken based on life expectancy rates and the value of your retirement account balance as of the end of the previous year and multiplies it by fifty percent. It is important to note that as you get older, your life expectancy rate will decline and your RMD amount will increase. Work with your tax preparer and broker to determine your yearly RMD. RMDs are required for those, not 70 ½ if they are the spousal beneficiary of an inherited IRA, 401(k) or other retirement account and qualify for stretch distributions. Roth IRAs and 401Ks are not subject to RMD provisions. This makes them a good safety net for keeping your money long term for later use or heirs, as well as earning tax-free income during your lifetime. If you do not have a Roth, you may want to look into converting your traditional retirement plan to a Roth before the RMD age. You will pay taxes on the conversion, but you may save more taxes by keeping your RMD down, as RMDs are subject to taxation and may force more of your Social Security to be taxable (and Medicare Part B premiums could be affected).
There are several things you can do that will be helping your children, and some of them may have tax benefits to you. One thing you can do is gift any person up to $15,000 in a single year without having to count it against your lifetime gift exemption. As this is a person to person transaction, both you and your spouse can gift to a child, thereby giving them $30,000. Additionally, if they are married, you can also each gift to their spouse. Another way to assist your children, and potentially take a tax benefit, is to contribute to a 529 plan. These are savings plans that grow tax-free for use for qualifying educational purposes. While these are not deductible for Federal tax purposes, many states offer a tax deduction for the contribution to the state’s plan(s).
Another way to potentially save on taxes is to sell stock at a loss to offset any gain incurred during the course of the year. While no one like to take a loss, it can be worth it if you know you will incur a large tax hit. Additionally, you can take an additional $3,000 a year loss against ordinary income over and above the capital gain offset. Any additional amount gets carried forward to be used in the following year(s). Be sure to not rebuy until 30 days after the sale, as you cannot deduct the loss otherwise.
Try to maximize your Schedule A itemized deductions by grouping your donations to charity into a single year instead of spreading them out over more than one year. You can also group as much property tax payments as possible into a single year for taxes that you have already been billed for in the current year. With the reduction inability to take more than $10,000 in accordance with the Tax Cuts and Jobs Act, this deduction will not go as far as it used to. Be sure to use your flexible spending account to assist with medical expenses, as most taxpayers will no longer qualify for the benefit of Schedule A.