Year-End Tax Tips to Save You Money

Yes, I know, what could possibly be more fun to read than tax tips. Rest assured, this is quick and understandable – and could save you money.

Max out your retirement account contributions

The best way to lower your tax liability is to increase your contributions to your 403(b) or 401(k). Every dollar contributed will decrease your tax liability by that same amount.

• The maximum allowed for 2018 for 401(k)s or 403(b)s is:
  • $18,500 for those under 50 – this does not include your employer’s contributions;
  • $18,500 plus $6,000 for those 50 and over;
  • UK faculty and staff can also contribute those same amounts to a 457(b) plan – a great tool to save 2 years for every 1 worked;
• For IRAs, those under 50 can contribute $5500 and those 50 and over may contribute $6500 – those contributions can also reduce your tax liability.
• As the rules for who qualifies to make tax deductible contributions to IRAs are complicated, consult a tax professional or your financial advisor to see if you qualify.
• If your income is too high to make tax deductible contributions to an IRA, consider contributing to a Roth IRA instead. While you won’t receive a current year tax deduction, your contribution will grow tax-free so when you take a withdrawal after the age of 59 ½, you will pay no income tax or capital gains tax. There are income limits here too so, again, ask a professional first.

New federal tax laws

Last year about this time Congress passed a major overhaul to the federal tax code. While it did a lot, here is what you need to keep in mind:

• The new standard deduction has risen to $12,000 for singles and $24,000 for married couples.
• The law caps the deduction for state and local taxes at $10,000.
• The total of your itemized deductions – state and local taxes, home mortgage interest and charitable contributions are the broad categories – must exceed $12,000 for singles or $24,000 for married couples in order to itemize.
• These changes mean a lot of us won’t itemize deductions anymore.

Charitable contributions

• Unless your deduction for state and local taxes plus home mortgage interest and charitable donations exceeds a total of $24,000 for married couples or $12,000 for singles, you likely won’t receive a tax deduction for gifts to your favorite charities.
• Tip: If your itemized deductions are close to that new standard deduction threshold, consider making some charitable contributions this year that you are planning for 2019. This will give you a bigger tax break for 2018 and you can just take the standard deduction in 2019.
• You may also gift appreciated stock or mutual funds from your taxable accounts directly to a charitable organization. You may or may not receive a current-year deduction, but you will avoid paying any capital gains taxes.
• And, if you are over 70 ½ and taking Required Minimum Distributions, which are taxable, consider making a Qualified Charitable Distribution. In other words, gift part or all of your RMD to a charity and avoid paying income tax on that amount.

Tax Loss Harvesting

This is a fancy way of saying you can sell any investment in a taxable account that is worth less now than what you paid for it, and use that loss to offset gains realized when you sold a winner. And, as a total, if your losses are more than your gains, you can use up to $3,000 of excess loss to reduce other income.

There aren’t too many people who find taxes interesting, or even tolerable, to think about. But, a few minutes now may help reduce your tax liability for 2018. As always, these issues are complicated so your financial advisor should help provide some guidance. Tax preparers can be a resource too, but most are better at looking backwards than forwards, where us advisors like to face forward.

Steve Byars