The end of the year is fast approaching, which means for taxpayers wanting to minimize their bill, there are some key moves that should be made now. While some of these tasks are applicable every year, the Tax Cuts and Job Act passed in 2017 spurred additional changes that could heavily affect what you owe.
Here are six actions to take before the year ends to ensure you’re not faced with anything unexpected come April:
1. Make sure you're withholding enough.
The new tax law revamped the tax withholding tables, which help determine how much income tax your employer withholds from your paycheck. Withholding is based on how much you earn as well as the number of allowances you claim on your Form W-4. Many people have already noticed a bump in their takeaway pay due to the revised withholding guidelines. That said, it’s worth revisiting your withholdings to ensure they still make sense. The IRS offers an updated withholding calculator to help. Withholding too much could mean a surprise refund, but withholding too little may leave you with an unanticipated tax bill.
2. Review your deductions.
While tax reform lowered the effective tax rate for many people and significantly increased the standard deduction, it also did away with several common deductions. If you rely on itemized deductions to keep the taxes you owe in check, then you need to examine what’s changed now so you're not caught off guard later. For example, a few of the most popular deductions that aren't allowed for 2018 include moving expenses, job expenses, and tax preparation fees.
3. Ramp up your charitable giving.
The lifetime gift and estate tax exemption increased to $11.18 million this year from $5.49 million in 2017, also because of the new law. If you’ve created an estate plan or charitable giving strategy pinned to the lower figure, you can now increase your giving without facing additional taxes. However, the current lifetime exemption is set to expire by 2025, unless Congress takes further action. If you have a charitable giving plan, you should consider taking advantage of this window now to gift more of your assets tax-free.
4. Determine if you qualify for the small business, pass-through deduction.
One of the more talked-about elements of the new tax law is the 20% deduction, which applies to pass-through business entities such as LLCs, S Corps, partnerships, and sole proprietors. Business owners can deduct 20% of their business income if their taxable income is less than $315,000 for joint filers or $157,500 for single filers. The deduction significantly lowers the potential top effective tax rate from 37% to 29.6% and could be a win for many small business owners. But who exactly qualifies depends on the nature of your business. For instance, attorneys and investment advisors are excluded from the deduction, so you should talk to your accountant now to see if you’re eligible.
5. Put money in your tax-advantaged retirement accounts.
Saving money in pre-tax retirement accounts, such as employer-sponsored 401ks and IRAs, is one of the best ways to reduce your overall tax burden. While you can technically make contributions to your accounts for this year through April 15, 2019, the end of the year is a great time to review whether you’ve saved as much as you can – or if saving more would knock down your taxable income and potentially your overall tax bill. Worth noting: The contribution limits to 401ks increased to $18,500 this year, which is the first contribution increase since 2015.
6. Use your flexible spending account funds.
If you’ve set aside money inside a flexible spending account, make sure you spend most of it by the year’s end. You can contribute up to $2,650 before taxes, so the accounts make lots of sense if you have planned out-of-pocket medical expenses. While the IRS allows you to carry over $500 to the next year, you forfeit any additional funds left in the account. Check with your plan sponsor to see what’s remaining and also review what expenses are—and aren’t—eligible for those funds. The expenses covered vary by plan, but commonly include such services and products as acupuncture, chiropractic care, birth control, contact lenses and solution, eyeglasses, dental work, and physical therapy.
April may seem far away, but making smart tax moves now to ensure you're prepared to make the most of the tax changes will pay off in the long run. And most importantly, you won't be caught off guard.