With 2018 coming to a close and the 2019 tax season fast approaching, there is still time to take advantage of some tax-saving strategies for this year. Below are four year-end tax tips that could be useful whether you are trying to maximize your refund or minimize what you owe.
Contribute to an IRA
Contributing to an Individual Retirement Account (IRA) is a great way to reduce your taxable income while saving for retirement. The Internal Revenue Service (IRS) allows individuals to contribute up to $5,500 per year to an IRA. If you are age 50 or older, you can contribute up to $6,500 per year. These contributions are tax-deferred, so they can be deducted from your taxable income. Keep in mind you can only contribute to an IRA if you have earned income, though the IRS does allow a working spouse to contribute to an IRA on behalf of a nonworking spouse. There are contribution limits if you are already contributing to another retirement plan like a 401(k), and there is usually a 10% penalty if the money is taken prior to age 59½. You cannot make IRA contributions after age 70½. You have until April 15, 2019 to contribute to an IRA for tax year 2018.
Harvest Tax Losses
Losing money on your investments is never the goal, but if you have losses in 2018, they can be used to offset gains for the year. If you have greater realized capital losses than gains, you can also use up to $3,000 per year to offset ordinary income. Any losses greater than $3,000 can be carried over to future years. While tax loss harvesting is a useful tool to offset short- and long-term gains and reduce taxable income, make sure you understand which investments you are planning to sell and what impact the sale will have on your portfolio and investment goals. If you decide to implement this strategy, it is also important to understand the IRS wash-sale rule, which prohibits investors from deducting losses from sales or trades and then rebuying the security or a substantially identical stock or security within 30 days of the sale.
Maximize Medical Expenses
If you itemize your deductions, you may be able to deduct medical and dental expenses incurred in 2018. The IRS currently allows a deduction of medical expenses that exceed 7.5% of your gross income. Let’s say an individual has $50,000 in adjusted gross income and has $6,000 in medical expenses. By multiplying $50,000 by 7.5%, we see only expenses exceeding $3,750 are deductible. Then, we take the $6,000 in medical expenses, subtract $3,750, and we see the individual’s medical deduction would be $2,250 for 2018. Beginning in 2019, taxpayers will only be able to deduct unreimbursed medical expenses that exceed 10% of their adjusted gross income. It makes sense for individuals with planned medical expenses to try and squeeze those expenses into 2018 to take advantage of the lower level.
Make a Charitable Contribution
Individuals may be able to donate or gift up to 60% of their adjusted gross income and receive a tax deduction. There are several ways to see tax benefits from donating to charity. Individuals who are age 70½ must begin taking required minimum distributions (RMD) from their IRAs and 401(k) plans each year. These distributions generally count as taxable income, but if a distribution is donated as a qualified charitable distribution and paid directly to a qualified charity, the individual can avoid paying taxes on the RMD. Another way to maximize the benefits of donating to charity is to donate appreciated stock. If you have a stock that has appreciated over time, you will have to pay taxes on that growth when you sell the stock, even if you donate the proceeds to charity. By donating the stock directly to a charity, you can avoid paying the capital gains on the stock, you can still take the deduction, and the charity will receive the full value of the donation.