It is hard to believe, but tax time is quickly approaching. However, there is still time to make some tax moves. Here are a few you might want to consider.
Make time for review
It is important to actually take the time to review your tax situation. This includes both the current year and the next. A good understanding of your tax picture and how it might change going forward is vital to the planning process.
Decide if income deferral is a good move
If your tax bracket will be lower next year, it might be beneficial to defer income into 2019. If you have control over the timing of your bonus, collection of rents, or payments of services, this strategy could work for you.
Decide if accelerating deduction is a good move
If you decide that your 2018 income might be taxed at a higher bracket, accelerating deductions could be for you. For example, consider paying state and local income tax estimates before the end of the year, provided they are below the $10,000 Cap.
With both income and deduction planning, make sure to assess the impact on your alternative minimum tax situation (AMT). What is beneficial in one year may negatively impact the next. As a matter of year-end planning, you should review your AMT situation for the current year and then the next.
Review your retirement plan savings
Not only does contributing the maximum amount you can to your employer-sponsored retirement plan (for example – your 401(k)) reduce your taxable income, but it also can help your retirement picture considerably.
Take required minimum distributions
Once you reach age 70 ½, you generally must start taking required minimum distributions from your IRA and employer-sponsored retirement plans. The government doesn’t want the tax deferral on these plans to continue indefinitely. Take any distributions you need to by the end of the year. The penalty for not taking the required amount is high — 50 percent of the amount you should have taken but didn’t.
Review your portfolio
As we always say, tax considerations should not drive your investment decisions. However, it is worth reviewing your portfolio for year-end investment moves. Perhaps you have some loss positions that you were considering selling anyway. Any losses over and above your gains can be used up to $3,000 against your ordinary income ($1,500 if your status is married filing separately). Any losses that you can’t use in 2018 can be carried forward into future years.
Check your tax withholding
Once you have reviewed your tax situation, it is time to see if you might owe taxes come April 15th of 2019. Given all the tax law changes in 2018, it is important to do so. If it seems that you have under withheld, you might want to consider increasing your tax withholding. To do so, ask your employer for a Form W-4. Increasing your withholding over your remaining 2018 pay periods has an advantage. The withholding is considered paid evenly over the year, thus lessening the chances of an underpayment in any given quarter. Make sure to double check the withholding again in January of 2019 to ensure it is going to be correct for that year as well.
Seek professional help
Depending on your tax situation, now may be the time to think about hiring a professional. This might be especially true if your tax situation changed in 2018. Perhaps you started a business or bought a rental property. This year also included considerable tax law changes. It may make sense for you to talk through your unique situation with a professional.
Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com.