6 Ways to Reduce Your Taxes
With the holidays rapidly approaching, tax planning may be the furthest thing from your mind. But now is actually a good time to consider some money moves that can help you avoid paying Uncle Sam more than you have to. Patrick Horning, an advanced planning attorney at Northwestern Mutual, shares tips to consider that can help reduce your 2018 taxes.
1. FINE-TUNE YOUR WITHHOLDING
The new tax law that was passed in late 2017 reduced marginal tax rates; as a result, the amount of taxes being withheld from your paycheck by your employer is likely to have changed. It’s probably a good idea to review your withholding if you haven’t done so recently. If you aren’t withholding enough, you increase the likelihood that you’ll owe come tax time. The IRS has an easy-to-use online withholding calculator that can help you determine if you need to make any adjustments. (If you find you do, contact your HR department ASAP.) If you aren’t withholding enough, Horning recommends making an estimated tax payment before the end of the year to avoid paying a penalty.
2. “BUNCH” CHARITABLE CONTRIBUTIONS OR OTHER DEDUCTIBLE PAYMENTS
Another big tax-law change: The standard deduction has nearly doubled to $12,000 for individuals and $24,000 for married couples filing jointly. At the same time, it rolled back many itemized deductions that taxpayers may have become accustomed to taking — for instance, the new law added a $10,000 cap to the amount of state and local taxes you can deduct.
If the amount of deductions you plan to itemize is close to the standard deduction amount, it may make sense to bunch certain deductible expenses so you can push your itemized deduction amount higher — for example, you could make two or more years’ worth of donations before the end of 2018. “Bunching contributions in this way enables you to maximize itemized deductions in a given tax year and then take the standard deduction in the following year,” Horning says. If your local government allows it, you could also make two years’ worth of property tax payments in a single year. Just remember that your deduction will still be capped at $10,000.
3. REVISIT YOUR RETIREMENT SAVINGS
If you have a lot of taxable income this year, you may want to consider contributing to a qualified retirement account like a traditional 401(k) or IRA. Your contributions can help reduce the amount of income you’ll owe taxes on this year, and whatever you contribute to an IRA until the tax-filing deadline (April 15, 2019) can count toward this tax year.
If you don’t need to lower your taxable income this year, though, you may want to consider contributing to a Roth account. That money will be taxed today, but you won’t owe any taxes on your future investment growth. Also, if the idea of your money growing tax-free appeals to you, you may want to consider converting any traditional accounts you have to a Roth account.
4. REVISIT A 529 EDUCATION SAVINGS PLAN
Helping to advance a child’s education became easier, financially, with the new tax law. In addition to funding college expenses, you can now also use a 529 plan to pay for up to $10,000 of tuition to an elementary or secondary school. You can contribute up to five years’ worth of gifts in one year (that would total $75,000 per beneficiary, $150,000 from a married couple, assuming you make no other gifts to that person over that period), but you must list those gifts on a tax return for the year the gift is made.
But Horning encourages parents and grandparents to tread lightly in using 529 savings for tuition for younger students. “By withdrawing funds early from a 529 plan, you lose the opportunity for that money to grow and compound, tax-free, for your child’s college needs.”
5. LOOK FOR TAX-LOSS HARVESTING OPPORTUNITIES
Tax-loss harvesting is when you use your investment losses to offset taxes you would owe on investment gains. If you had some stocks that lost value this year, you could sell them off and use those losses to offset what you would owe on the winners. “Just be careful not to buy the same investments within 30 days before or after the loss sale, as that means you cannot utilize the loss,” Horning says. If you’re working with a financial professional, ask him or her about this, as many advisors can help you with this as part of the service they provide.
6. DEFER BONUSES
If you’re entitled to a bonus this year and worried it could cause you to owe more in taxes, you may be able to push the receipt of that money into the beginning of 2019 by asking your employer to delay payment. “Of course, you’ll have to pay income taxes on that money once you receive it. However, if you expect to be in a lower tax bracket next year, deferring income into 2019 could save you money,” he adds.
Because these and other provisions may require a shift in your tax strategy, Horning suggests you start the new year on the right footing by consulting with your tax and financial professionals to make sure you’re leveraging all your opportunities to minimize taxes, boost savings and ensure your assets are protected for your future.
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