With the start of a new year, we look forward to the arrival of spring and sunnier days, but January also marks the beginning of the often dreaded tax season. While some of us get excited for a long-awaited tax refund, many stress over getting their taxes filed correctly and paid on time. The December passage of the Tax Cuts and Jobs Act into law means the upcoming tax season may be all the more stressful as Tax Day nears. With this in mind, we want to discuss four tax strategies that could help you save money on your tax bills in 2018.
1. Invest in your retirement plan – This may sound obvious, but it is a great way to save and make a real difference at the end of the year. These type of retirement savings incentives were unaffected by the Tax Cuts and Jobs Act. As an example, investors in the new 24% federal tax bracket who contribute $10,000 to a qualified plan like a 401(k) will reduce their income by the same amount, regardless of how much they make. You can elect to have the contribution taken directly from your paycheck. For those who do not have a retirement plan with their employer, a personal retirement plan can provide the same tax benefits. You can contribute automatically from a personal account, making the contributions automatic just like a 401(k). If you have an IRA and haven’t yet maxed out contributions for 2017, you are able to make prior year contributions until April 18, 2018.
2. Donate to charity – Even though the new law increases the standard deduction and eliminates income phase-outs, the charitable rules still apply. Individuals can donate or gift up to 50% of their adjusted gross income in the form of cash (or property) at fair market value and receive a deduction each year. More complex gifting strategies for the right investor can provide great opportunities without stock market participation. Track donations and gifts you make throughout the year to document and confirm you are able to deduct these donations. These strategies may be beneficial for all individuals; such as those who are planning for college, retirement, and those who are already retired.
3. Income tax deferral – Income tax deferral is a strategy focused on taking the income you earn but don’t plan on using throughout the year. You are able to set those funds aside to be realized and taxed at a later date. Employers and small business owners offer deferred compensation plans to select individuals to defer income to a later year.
4. Dividend tax deferral – For investors who don’t have an IRA or 401(k), a tax-deferred investment vehicle may prove useful. These investments defer all dividends and capital gains. Just like a retirement plan, the investor is taxed when they remove assets from the plan. In using these investments, the future income is taxed as earned income. To have maximum tax deferral, an individual must defer distributions until he or she reaches 59.5 years old. If 2018 may be a high tax year, this strategy may be worth a deeper look.
Each investor, family, and business has different goals and needs that drive their financial decisions throughout the year. It isn’t always easy to think ahead about savings and taxes, but a little bit of forethought when it comes to these strategies can make Tax Day a little less stressful.