The new tax law has put a whole new spin on year-end tax planning, though it hasn’t eliminated the need to do it altogether.
“The tricks we had in our back pocket have been taken away in the name of simplification,” said Nathan Smith, a director in the national tax office of CBIZ MHM in Tampa.
“What we want to do now is look at what we have left to work with.”
For starters, fewer people will itemize under the Tax Cuts and Jobs Act. Now, an individual will need total itemized deductions to exceed $12,000, the new standard deduction for individual taxpayers, up from $6,350. Married couples would need deductions exceeding $24,000, up from $12,700.
Even with the nearly doubled standard deduction, there are still moves you can make before 2018 ends to make sure you’re taking advantage of all of the breaks you can get, Smith said — as well as some tried-and-true strategies that still apply.
Here are some of the best ways to lower your tax bill for 2018:
Reduce your taxable income dollar-for-dollar by contributing as much as you can to your 401(k) or employer’s retirement plan by Dec. 31.
If you are 18 or older, you can save up to $18,500 to your 401(k), and if you are over 50 you can kick in an extra $6,000. With IRAs you can contribute $5,500, and if you are over 50, an additional $1,000. (You have until the April deadline to make those IRA contributions.)
Additionally, if you are self-employed and contribute to SEP IRAs, you can deduct up to 25 percent of compensation or $55,000 for 2018.
“Make sure you’ve taken advantage of your employer’s match to your 401(k) plan. Better yet, make sure you’ve maxed out how much you can contribute,” said David Desmarais, a CPA at KLR, a Boston-based accounting firm.
“Leaving this benefit underutilized is the same as leaving money on the table.”
(If you contribute to a Roth 401(k) or Roth IRA, you won’t get a tax break, but your money can grow tax-free and generally be withdrawn tax-free in retirement.)
Although the number of homeowners who can benefit from the mortgage tax break fell significantly under the new tax law, about 13.8 million taxpayers will still be able to claim the mortgage-interest deduction in 2018.
If you own a home and get a mortgage interest deduction, make an extra mortgage payment on Dec. 31 to get that additional deduction on this year’s taxes.
For new homeowners (or those who bought a home after Dec. 15, 2017) who will still be able to take advantage of the tax break, the interest they can write off is limited to $750,000 in loans, down from the previous $1 million.
After this week’s market downturn, chances are you have some investments that lost value this year.
You can use those losses to zero out capital gains, and then deduct up to $3,000 a year against ordinary income. Losses in excess of that can be carried forward to future tax years until the balance is used up.
For example, if you have $10,000 of losses and $5,000 of gains, you have an overall loss of $5,000 — and up to $3,000 of that loss can be used to offset your ordinary income. The additional $2,000 in losses can be shifted to next year’s return.
For just that reason, tax-loss harvesting is a popular tool for maximizing after-tax returns, most commonly in the fourth quarter of the year, when investors aim to lower their tax liability. (But this strategy only works on taxable accounts, not your 401(k) or IRA.)
If your health-care costs exceed 7.5 percent of your adjusted gross income in 2018, you may be able to deduct those expenses.
Tally up how much you spent on health insurance, Medicare premiums, long-term health insurance premiums, nursing home costs, orthodontics and other out-of-pocket expenses to see if the total exceeds the medical expense threshold.
You can deduct everything you spend over that amount (but you can’t double dip and count expenses paid for with tax-advantaged flexible spending or health savings account dollars).
You also can’t take this tax break if you opt for the standard deduction – it only applies if you itemize all of your deductions.
Even though the deduction for donations is unchanged, you still need to itemize to claim it, and that’s a much higher bar this year.
One way to surpass the new, higher standard deduction is to save money over time and donate every two or three years instead of every year — a strategy called “bunching.”
For example, instead of giving $5,000 to charity annually, accelerate the gift by giving $10,000 every two years. This way, you may get your itemized deductions over the limit one year and take the standard deduction the next.
One way to accomplish this is with a donor-advised fund, which lets you make a charitable contribution and receive an immediate tax break for the full donation, and then recommend grants from the fund to your favorite charities over time, according to Jennifer Lowe, a senior director at Wolters Kluwer, Tax & Accounting.
If you go this route, make your 2019 donations before Dec. 31 so you can count them on your 2018 return.
If you get a year-end bonus at work, it could bump you up to another tax bracket and increase the taxes you owe.
See if your employer will pay you your bonus in January, advised Lisa Greene-Lewis, a CPA and tax expert at TurboTax. You will still receive it close to year-end, but you won’t have to pay taxes on it when you file your 2018 tax return.
“You don’t want to defer your bonus for too long, but a few weeks makes sense,” added CBIZ’s Smith.
Currently, an ex-spouse who pays alimony can deduct the payments and the recipient spouse, who is presumably in a lower tax bracket, must pay taxes on the money.
As of Jan. 1, the tax deduction for alimony will be eliminated. From then on, the IRS will treat alimony payments the same way it does child support, making it tax-free for the recipient and not deductible for the payer.
One divorce calculator shows that there could be less money to go around after the new tax rules go into effect — resulting in smaller alimony payments overall. That makes it worthwhile to get your the terms of your divorce settled before the New Year.
“It’s high stakes, especially for high-income couples,” said Stacy Francis, a certified divorce financial planner and the president and CEO of Francis Financial. “You’re talking about a lot of money that is going away. It just won’t be there [without the tax break].”
However, “this is not something to rush, it will impact you and your family for the rest of your life,” she added.
“On the Money” airs on CNBC Saturdays at 5:30 a.m. ET, or check listings for air times in local markets.