As we come to the end of the year, Dave Marrinson, who has been helping clients with their tax issues for many decades (he won’t say how many), has some ideas for you to ponder with your business partner and spouse.
- Look at your 2018 income and tax payments and compare it to last year. If you are in danger of being penalized for underpaying tax throughout the year, you can make up the shortfall through increased withholding on your salary or bonus. Bumping up your last quarterly estimated tax payment can still expose you to penalties for underpayments in previous quarters. But, a better solution, withholding is considered to have been paid ratably throughout the year, so a big jump in withholding on high year-end wages can reduce or eliminate penalties.
- Many taxpayers who routinely itemized deductions in past years are expected to take the standard deduction in 2018, because the standard deduction is doubled, while dozens of itemized deduction are repealed and the state and local tax deduction is capped at $10,000. Take a look at whether you might derive more tax benefit by “bunching” deductions- paying two years of charitable contributions (beginning in 2018?) and perhaps elective medical expenses every other year – so that you might get more combined savings by itemizing in year 1 and taking the standard deduction in year 2.
- Retirement plan contributions – it’s not too late for taxpayers to increase their contributions. Contributions reduce taxable income at the time they are made, and you don’t pay taxes until you take the money out at retirement. The 2018 contribution limits are $18,500 for 401(k) (plus $6,000 if over 50 years old) and $5,500 for an IRA (plus $1,000 if over 50 years old). At a minimum, take advantage of any employer match.
- Don’t squander the gift tax exclusion – Taxpayers can give up to $15,000 to as many people as they wish in 2018, free of gift or estate tax, and get a new annual gift tax exclusion every year, so they shouldn’t let it go to waste. Taxpayers and their spouses can use their exemptions together to give up to $30,000 per beneficiary. If they have four children and 10 grandchildren, for example, they can remove $420,000 from their estate tax-free this year.
- Harvesting capital losses – If you have net capital gains for 2018, consider selling any stocks for which you could realize capital losses to offset those gains.
- Businesses – here are two things to consider as we end the year. First, if your business is a cash basis entity, prepay expenses and consider deferring bills to customers until after December 31. Second, purchase your machinery and equipment now to take advantage of the higher limits on immediate deductions for those purchases.
Contact your SDK advisor to discuss more ways to reduce your taxes. Visit the tax team page here.