Each year around this time, I get calls from clients looking for ways to save on taxes. Here are 5 tips that could help reduce that burden in April:
Maximize your 401(k) contributions. If you are a participant in a traditional employer-sponsored defined contribution plan, the 2018 contribution limit for a 401(k) is $18,500, with an additional $6,000 catch-up allowed for individuals 50 and older.
Consider contributing from a year-end bonus to take advantage of the maximum contribution. Beginning in 2019, the contribution limit is set to increase to $19,000. The catch-up contribution remains the same at $6,000.
If you are self-employed and will not have employees, you can establish a “one person” 401(k) plan. Under this plan, you can make elective contributions of up to $18,500 for 2018 ($24,500 if you are over age 50) and can make profit-sharing contributions up to a maximum of $55,000 counting both the employer and the elective contributions (not counting catch-up contributions). The plan must be established by the end of the year to claim a tax deduction for contributions for that year, although you do not need to make contributions until the due date (with extensions) of your return.
Contribute to an IRA. If your employer does not offer a retirement plan, consider a traditional or Roth IRA. The 2018 contribution limit on IRAs is $5,500, with an additional $1,000 catch-up for taxpayers 50 and older. With a traditional IRA you can likely deduct your contributions, though your deduction may be limited if your spouse participates in an employer-sponsored plan.
Consider making contributions to Roth IRAs instead of traditional IRAs. Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made 1) after a five-year period, and 2) on or after attaining age 591⁄2, after death or disability, or for a first-time home purchase.
If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so.
HSA Contribution: If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible health savings account contributions for 2018. This is so even if you first became eligible on December 1, 2018 The maximum annual contribution to an HSA for 2018 is $3,450 for self-only and $6,900 for family coverage.
If you are not eligible for a HSA, see if your employer offers a FSA account. You can increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. The maximum annual contribution to an FSA that a cafeteria plan can allow is $2,650 for tax year 2018. This amount is scheduled to increase to $2,700 for 2019.
Bulk up 529 plans. The TCJA now allows taxpayers to take up to $10,000 in distributions per student for public, private, or religious elementary and secondary school tuition costs. If you have young children or grandchildren, consider funding their 529 plans at a higher level to grow tax-free and cover a portion of the cost of elementary and secondary schools in addition to college tuition.
Other year end consideration when thinking about tax planning :
- Look to use tax-loss harvesting to offset gains.
- Standard deduction increases to $24,000 for married filing jointly ($12,000 for single)
- $10,000 maximum itemized deduction for income, property and sales taxes
- No deduction for home equity loans unless used for acquisition indebtedness
- No deduction for miscellaneous itemized deductions (i.e., investment fees, unreimbursed employee business expenses, tax preparation fees)
- Repeal of the personal exemptions
- Increase in child tax credit to $2,000 (subject to income limits)