With less than one week left in the year and taxes being a significant percent of where our income goes, consider the following to reduce your 2018 tax bill:
1) Estimate your Total Income. Update your accounting records; estimate your total income. Work with your CPA (or do it yourself) to do a quick estimate of your tax liability.
2) Business owners reduce Taxable Income to below 20% QBID Threshold of $157.5K ($315K married). If you can reduce your taxable income to below $157.5K ($315K married), your qualified business income will be eligible for the new 20% qualified business income deduction (QBID). Your taxable income = AGI (adjusted gross income) – deductions (itemized or standard).
Below are 13 ideas to consider at year end to reduce your taxable income:
1) Max Out Retirement Contributions (401K, IRA, SEP-IRA). You have until Dec 31 to max out your 401K contribution to $18.5K ($24.5K if > 50yrs old). If you are self-employed, you can contribute up to $55K ($61K if >50yrs old) to a SEP-IRA, and you have until 4/15/19 to do so (or 10/15/19 if filing on extension). You also have until 4/15/19 to contribute to an IRA ($5.5K, $6.5K if >50). For those who have maxed out your 401K, you can contribute to a Roth IRA. Even if your income exceeds the limit, you can contribute to a “back-door Roth” IRA (contact me for details). Note: You cannot contribute passive income (e.g., rental income) to a 401K or SEP-IRA.
2) Sell losing stocks to offset winning stocks. Selling stocks or other investments that are losers to offset gains from winners is called harvesting. Make sure that it’s a real loss before you sell. Focus on non-tax deferred accounts (e.g., not 401K accounts whose gains are sheltered from taxes). You can use up to $3K of losses to wipe out income and carry over the remaining loss to the next year. Note: there may be other non-tax reasons for not selling losing taxes.
3) Buy stuff needed for your business. Now is the time to buy those things you need for your business but have been putting off because those purchases can reduce your taxable income. For example, you can deduct business equipment (car, computers, software, etc.). You can deduct property you use over 51% of the time for your business. Businesses may immediately expense the cost of section 179 property – up to $1 million. If you have questions, check with your tax pro before spending your cash.
4) Maximize 529 Contributions. 529 contributions can reduce your state income tax (not your federal income tax). For example, on a Maryland state income tax return, a married couple filing jointly can deduct up to $5K in contributions per child. Starting in 2018, 529 plans were expanded from just being used for college expenses to being allowed up to $10K per student for public, private and religious elementary and secondary schools.
5) Open a Health Savings Account (HSA). If you have a high deductible health insurance plan, you qualify for an HSA. A “high deductible” would be one that’s over $1,350 for an individual plan in 2018/2019 or $2,700 for a family plan. You’re allowed to contribute up to $6,900 to an HSA if you have a family health insurance plan for 2018 or $3,450 for an individual plan (increases to $7,000 and $3,500 in 2019). There’s also a $1,000 catch-up contribution allowed if you’re over 55.
6) Schedule Last-Minute Medical Procedures. If you itemize, medical expenses remain deductible, and you can deduct the portion of medical expenses that exceed 7.5% of your AGI. Medical expenses include such items as prescriptions, doctor’s visits, health insurance premiums, dental procedures or an operation you’ve been putting off. Surgeries and procedures don’t have to be for a life-threatening condition to be considered medically necessary; they might include anything from cataract removal to a root canal. The deduction is available in the tax year in which the bill was paid, not when services were rendered. You could pay the doctor this year for the procedure he does next year and claim the deduction this year. (In 2019, the only medical expenses that are deductible will be those that exceed 10% of AGI.)
7) Give to Charity if itemized deductions are near threshold. If your itemized deductions are near the thresholds of $12K single, $24K married filing joint, then giving to charity may push you over the limit so that you can deduct the gifts.
8) Go into business for yourself. As an employee, the deduction for unreimbursed employee expenses (such as a home office deduction and office supplies) was eliminated in the tax reform bill but are still available for self-employed persons and businesses entities. If the loss of unreimbursed job expenses will hit you in the wallet, and if you’ve been thinking about taking the plunge into owning your own business, now may be the time.
9) Move. If you are already moving from a state with high income and property taxes to a state with lower taxes, getting it done before the end of the year would help.
10) Home Related Energy Efficiency Credits. An incredible 30% Federal credit still exists for solar, wind and geothermal costs; and a $7,500 Federal credit for buying a fully electric car still applies through the end of 2018. These are big dollar items but, if you are already committed to purchasing them, do so before 12/31/18 in order to get the tax credits.
11) Watch Flexible Spending Accounts. Make last minute trips to the optometrist, dentist, drug store, and so on to use up unspent money in medical flexible spending accounts.
12) Make estimated tax payments. If you own a business or are self-employed, you must make quarterly estimated tax payments. Penalties are imposed on each underpayment for the number of days the tax remains unpaid. If you miss a payment, file and pay as soon as you can.
13) Chat with a Tax Pro. Income tax isn’t just a numbers and forms game--there’s a lot of subtle issues that can get lost, costing you time and money. Unless your taxes are very easy, using an experienced tax preparer saves you money. Go to item 2 at this link see if your finances fit in the scenario where a tax pro can save you money over their cost. Business owners can still deduct the costs of tax preparation and tax advice.
As is often said, don’t let the tax tail wag the dog, meaning that you shouldn’t make an important decision based solely on the tax consequences. However, you should consider taking advantage of timing your spending decisions to reduce your tax bill.
My practice is in Severn, MD, and I specialize in the following services for both businesses and individuals:
IRS Representation & Tax Resolution – I represent business owners and individuals who have tax debt or who have not filed their tax returns in a while. I represent you in audits and ALL dealings with the IRS. I negotiate settlements to reduce penalties and tax payments as much as is legally possible. My goal is to remove the need for litigation. I am Federally licensed directly by the US Treasury.
Tax Planning – I meet with business owners and individuals during the year to review their prior year tax returns, investments, accounting files, business finances, rental properties, legal entities, and anything else that impacts your taxes. I do a thorough top-to-bottom review of all the options available to you and provide a written plan of recommended actions you can take to reduce your tax liability before the end of the year. I keep up with all the tax laws and industry best practices to maximize your tax savings.
Tax Preparation – For businesses (Sole Proprietor, LLC/Partnerships, C-Corporation, S-Corporation) and individuals.
Real Estate Investing Accounting – For years I have successfully helped real estate investors improve their bottom line. As a real estate investor myself, I know far more about real estate investing accounting than do most accountants.
Accounting/Bookkeeping – For individuals and small businesses
Send me an email or give me a call for any help needed. You can reach me at:
Lisa D Church, CPA, EA, NTPI Fellow, MBA
7865 Clark Station Rd
Severn, MD 21144