Your Year-End Tax Planning Checklist

Wednesday, December 12, 2018

UPDATE: Download our 2019 Tax Planning Guide

By Aaron Meyer

We have reached that magical time of year when holiday decorations come out of their box, the world becomes a bit more colorful thanks to the miracle of LED twinkle lights, and everyone’s thoughts turn to tax planning. Okay, maybe not that last one. But they probably should, at least a little bit, especially in a year where the changes made to the tax code last year are about to take full effect.

Even with only weeks left in 2018, there are still some relatively simple end of year tax planning moves available to help lessen the burden in April 2019:

Verify Withholding and Correct Underpayments

With miscellaneous itemized deductions no longer allowed and deductions for state taxes paid capped at $10,000, many people will find that they owe more in 2018 than in previous years despite the higher standard deduction. As a result, it is important to validate the estimated and withholding payments that have been made throughout the year.

Although increasing your final estimated payment will only correct a Q4 2018 underpayment, increasing withholding can correct underpayments retroactively because the IRS lumps all withholding payments together and treats them as though they were made in equal parts across all four quarters.

If you are working with a tax professional, they will likely have already done projections to ensure accurate estimated payments for investment and other income, but if you are doing your own taxes, now is a good time to visit the IRS withholding calculator and see what, if anything, needs to be done.

Max Out Your 401(k)

The maximum tax-deferred contribution to a 401(k) retirement plan increased by $500 in 2018, reaching $18,500 for individuals under age 50. Individuals who are 50 or older by the end of the calendar year can make additional “catch-up” contributions of up to $6,000, for a total of $24,500 in 401(k) contributions in 2018. If you have celebrated, or will celebrate, your 50th birthday in 2018 and haven’t taken advantage of the catch-up contributions, there’s still time to do so before year end.

Accelerate Charitable Contributions

The changes to the tax code for 2018 increased the maximum allowable cash charitable contribution from 50 percent of Adjusted Gross Income (AGI) to 60 percent of AGI, which provides some additional headroom for individuals looking to reduce their 2018 tax burden through charitable gifting. Charitable contributions of long-term appreciated stock or property remain limited to 30 percent of AGI.

Even if you don’t have a charity in mind, contributions to a donor-advised fund (DAF) will allow you to take advantage of the tax deduction now and decide on a specific charity later. Your financial advising team can tell you more about a DAF if you do not already have one.

Harvest Losses

Prudent investors know that staying calm in a volatile market allows them to turn a challenging situation to their favor. Right now, there is an opportunity to harvest tax losses by selling depreciated stock and either exchanging it for stock that offers similar market exposure or by buying back the same stock after waiting at least 31 days.

Prudent investors know that staying calm in a volatile market allows them to turn a challenging situation to their favor.

Losses from the sale of depreciated stock will reduce your 2018 taxable income while the purchase of stock with similar market exposure, or later repurchase of the same stock, will have minimal effects on long-term investment return. Your advisor team can help you decide which strategy, if either, is best for your specific investment goals.

Maximize HSA Contributions

If you are eligible to make contributions to a health savings account (HSA), remember that the IRS allowed contributions of up to $3,450 for an individual or $6,900 for a family in 2018. Since money in an HSA account remains yours and contributions reduce taxable income, maximizing contributions is a smart tax planning move. Everyone eventually has medical expenses and using pre-tax money to pay for them is almost as good as getting a 20 percent (or more) discount.

Verify IRA Distributions

If you have reached the age of 70 ½, make sure that you have taken the annual Required Minimum Distribution (RMD) from your IRAs to avoid penalties. Also, if you do not need to use the income from your RMDs for living expenses or investing, consider making the RMD a Qualified Charitable Distribution (QCD). QCDs do not provide a deduction, but also do not count as income and therefore will not increase AGI, potentially avoiding phaseouts of other deductions.

Finalize That Divorce

Alimony payments made under a divorce agreement executed before January 1, 2019 remain deductible to the payor and includable as income to the recipient. For couples in which the individual paying the alimony is taxed at a higher rate than the recipient, the amount by which the payor’s deduction exceeds the recipient’s tax can effectively be “split” between the parties. This allows the payor to make large enough payments to offset the recipient’s tax increase while still retaining some tax benefit to the payor. In this situation, both parties end up better off than they would be under the rules for divorce agreements finalized after January 1, 2019, which disallow deductions for the payor and do not treat alimony as income to the recipient.

Year-End Gifting

The annual gift tax exclusion amount increased to $15,000 in 2018 from $14,000 in 2017, and married couples can double that to $30,000. If you are taking advantage of annual gift exclusions for estate planning purposes, remember that you have an extra $1,000 ($2,000 for couples) available this year in tax-free gifts that you can make to any individual.

The annual gift tax exclusion amount increased to $15,000 in 2018.

Final Words

Few people, if any, will be in a position to take advantage of all of these year-end planning opportunities, but it is worth taking a few moments now to reach out to your tax and financial advisors to ensure that you can take full advantage of any that are open to you.

Aaron Meyer serves as a tax advisor at Brighton Jones. He has a JD and an LLM in taxation from the University of Washington.

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