9 Tax-Saving Opportunities for 2018
By Steven T. Merkel, CFP®, ChFC®
With the passage of the Tax Cuts and Jobs Act of 2018, the tax planning landscape has changed significantly since last year – presenting new challenges and opportunities for our clients.
While your family’s circumstances are unique, most of the suggestions below are widely applicable for promoting year-end tax efficiency and keeping more money in your pocket as we enter the New Year.
Important: All of the following actions need to be completed before December 31, 2018, in order to achieve any tax benefit. Your CAS advisor can provide strategic direction on how to best apply our general recommendations to your specific financial plan.
#1 – Make the Most of the Annual Gift Tax Exclusion
The gift tax exemption has been increased to its highest level in history. In 2018, individual filers can gift up to $15,000 to each family member (joint filers can gift up to $30,000 per beneficiary).
Example: If you and your spouse have three children, you can give up to $30,000 to each child ($90,000 total) without paying any gift taxes.
Capitalizing on the annual gift tax exclusion is an effective way to reduce your taxable estate while providing your loved ones with a financial boost to end the year.
#2 – Take All Required Minimum Distributions (RMDs) for Individual Retirement Accounts (IRAs)
If you own one or more IRAs and are age 70½ or older, ensure that you have taken your required minimum distributions for each account. This includes RMDs for all inherited IRAs of which you are listed as the beneficiary.
Failure to take the annual RMDs can result in a penalty tax of 50% on the shortfall. For instance, if you were required to take distributions of $5,000 from an IRA in 2018 – but only withdrew $1,000 – you would owe the IRS $2,000 (half of the remaining RMD).
#3 – Maximize Retirement Plan Contributions
If you are under age 70½ and have been contributing to a retirement plan – a 401(k), traditional or Roth IRA, SEP IRA, etc. – you could benefit from making the maximum contribution to each plan.
In 2018, the limit on total combined contributions you can make to all of your traditional and Roth IRAs is $5,500 ($6,500 if you are above age 50). SEP IRAs and 401(k)s are also subject to annual contribution caps.
By reaching the limit each year, you will be taking full advantage of the tax-deferred benefits offered through these retirement accounts.
#4 – Evaluate Tax Loss Harvesting Opportunities
Especially with the recent downturn in many sectors of the domestic and international markets, you may want to consider selling some positions that have lost market value.
By “harvesting” this loss, you can leverage the decrease in value to offset taxes on both capital gains and income.
Tax loss harvesting can be an effective way to remove struggling stocks from your portfolio while also reducing your tax burden. Ask your advisor whether this strategy would be appropriate for your financial circumstances.
#5 – Be Smart with Charitable Giving
If you are age 70½ or older, you are eligible to make qualified charitable contributions (QCDs) directly from an IRA. You may transfer up to $100,000/year to the charity of your choice with no tax liability.
Important: Retain all of your receipts and written records of charitable gifts (including cash, property and appreciated assets) in the event that you are audited by the IRS.
Other tax-efficient strategies for your year-end charitable giving include donating to a private foundation, donor-advised fund (DAF), or charitable remainder trust.
Prior to the New Year, we will send you a more detailed breakdown of best practices for end-of-year charitable giving.
#6 – Utilize Health Savings Accounts (HSAs)
For those of you who are enrolled in a high-deductible health insurance plan, you may be eligible for a health savings account (HSA).
These savings accounts can be advantageous from a tax standpoint when you use your funds on qualified medical expenses. In addition, the funds can roll over and accumulate from year to year if they are not spent.
If you are eligible for an HSA, we recommend making a contribution each year (the appropriate amount is contingent on your anticipated medical expenses and other factors). The maximum annual contribution for an individual HSA is $3,450; for family HSAs, the limit is $6,900.
#7 – Establish and Contribute to 529 Plans
Another tax-advantaged account to consider is 529 plans. These education savings accounts can be established on behalf of your child or grandchild, and the earning accrued are completely tax-free if the distributions are spent on qualified education expenses.
In most cases, an individual may gift up to $15,000/year per beneficiary ($30,000 annually for married couples) to a 529 plan without gift tax consequences (see our previous article on 529 plans for more details).
#8 – Compare New Standard Deduction to Anticipated Itemized Deductions
The standard deduction for 2018 is significantly higher than in previous years (see table below). As a result, those of you who have typically itemized your tax deductions may find it more difficult to do so this year.
It may be in your best interest to shift (or “bundle”) some of your current-year deductions to 2019 if your itemized deductions for 2018 will be less than the standard deduction.
#9 – Check All Beneficiary Designations
Ensure that the desired beneficiaries are listed on all of your accounts, including (but not limited to) employer benefits, IRAs, life insurance policies, and annuities. Complete a new beneficiary form if your listings are inaccurate or out of date.
Also, adding “TOD” (transfer on death) to all taxable accounts is a great way to allow your beneficiaries to receive assets from your investment accounts after you pass without going through the probate process.
For more guidance on how to update your beneficiaries, see our article on the topic.
As we close out 2018, make sure that you are not missing out on any opportunities to reduce your tax burden for the year. As always, our team is happy to guide you through these action items to help preserve and enhance your family’s financial wellness.
For more details on how the new tax law could impact you, check out our comprehensive presentation.
