7 Year End Planning Opportunities - 2018 Edition.

Updated: Dec 17, 2018


As we begin to come to the end of the year, there's still plenty of time for planning opportunities. Below are a few topics to consider discussing with your planner or CPA as we close out the year.


Itemized Deductions

The recent tax law changes have increased the amount of the standard deduction to $12,000 for singles and $24,000 for married filing jointly. In effect, it's expected that fewer people will be itemizing their deductions and more will be taking the standard deduction.


Itemizing allows you to deduct certain expenses such as home mortgage interest, property taxes, and charitable contributions. If you take the standard deduction, these expenses are not deductible. It's a good idea to understand which camp you'll be in as this will allow you to plan.


Charitable Giving

As alluded to above, the new tax laws have all but eliminated the itemized deduction for many folks. This in turn has practically eliminated the charitable deduction that many have been used to getting in the past. However, while tax savings shouldn't be the only reason to give, it certainly is an added benefit. If you're on the cusp between taking the standardized deduction and itemizing, bunching your charitable donations in one year may get you over the edge.


For example, if cash flow allows, consider donating part or all of next year's contributions before year end. This will give you a boost in this year's deductions and might allow you to itemize, reducing this year's taxes, and thereby stretching your giving dollars.


Donor Advised Funds (DAFs) are getting more attention in light of bunching. A DAF can be looked at like a charitable investment account; it's sole purpose is to support those charitable organization that you care about. You can donate cash, securities (e.g. stocks, bonds, mutual funds, ETFs, etc.), or other assets into the DAF and you'll generally receive an immediate tax deduction. Those funds can then be invested, grow tax free, and are distributed based on your recommendation to a variety of IRS qualified public charities. If you're charitably inclined, DAFs can make a lot of sense in high income years such as when you've received a bonus, exercised stock options, or sold a business, for example, because you can take advantage of the higher deduction limit.


Finally, donating an appreciated investment has been a stalwart in tax and charitable planning. If you have an appreciated investment in a brokerage account, you can donate that investment and receive a potential tax deduction for the fair market value (FMV) of the investment today and you don't have to recognize the capital gain on the appreciation. It's a more efficient way of giving.


Health Savings Account (H.S.A) Contributions

For those that have a high deductible health plan, which is required to utilize this technique, consider maximizing your contributions into your health savings account. The 2018 contribution limits are $3,450 for individuals and $6,900 for families.


Health savings accounts are one of the rare triple taxed advantaged accounts. Contributions into the H.S.A. are deductible, the earnings grow tax free, and distributions used to pay for qualified medical expenses are also tax free. If contributed through payroll, they can also reduce Social Security and Medicare taxes.


Leftover funds in your H.S.A. are yours to keep from year to year; you don't have to worry about losing them. Overfunding your H.S.A. is a great idea as you can use the funds in case of a medical emergency later on or a planned surgery, if it qualifies. With some planning, my wife and I recently used our H.S.A. to help offset the cost of the birth of our son.


Health Care Flexible Spending Accounts

Flexible Spending Accounts (F.S.A.s) are special accounts that can be used to pay for copayments, deductibles, some drugs, and some other out-of-pocket health care costs. You cannot pay for premiums, though. The money that you set aside in the account reduces your taxable income. You also don't pay taxes on the funds when they are spent for qualifying expenses. You're also not required to have a high-deductible health plan as is the case with a health savings account (H.S.A.) discussed above.


What's the catch? Generally, it's "use it or lose it" in that the funds must be used within the plan year, typically December 31. Funds that go unused revert back to the plan are don't carry over.


As we get close to the end of the year, if you have a F.S.A., check to see what you have remaining to spend. Now's a good time to consider getting that eye exam taken care of, annual doctor's appointment, or completing that dental work you've been avoiding. Additionally, there are websites out there that specialize in only F.S.A.-eligible products. Stock up on what you need before the funds disappear!


One caveat is that an employer may optionally provide one of two provisions: allow a "grace period" of up to 2.5 extra months to use the money in your F.S.A. or allow you to carry over up to $500 per year into the following year. You'll need to check with your HR department or benefits package to see if either of these provisions have been elected by your employer.


Tax Loss Harvesting

Tax loss harvesting is the technique whereby you sell investments at a loss in order to recognize that loss on your tax return. Often, the sold security is replaced with something similar (but not exactly the same) in order to keep the overall portfolio in balance according to your investment policy. If you have a taxable brokerage account, scan through your investments to see if you have any losses that could be harvested. Discuss with your financial planner or CPA to see if this technique makes sense. The rules can be a bit tricky so it's best to get a good understanding before implementing this tactic.


Check Your Taxes

Year-end is a great time to project out what your potential tax refund or amount due will be when you file in April. If you're going to owe at the time you file, you can come up with a plan to either make an estimate by January 15 and/or start savings for April. Additionally, understanding what's causing a large refund or amount due can help you decided what changes can be made to help avoid the situation next year.


Place Property Into Service

This recommendation is for you small business owners and self-employeds out there. If you're looking at purchasing any business property in the next few months, such as a computer, office equipment or furniture, or manufacturing tools, for example, consider purchasing and placing the property into service before year end. You may be eligible to utilize Section 179 to deduct the cost of the placed in service property this year. Like the charitable giving technique, it's usually not a good idea to buy something purely for the potential tax savings; it needs to make business sense. However, if you're on the fence between buying now or Q1 of next year, doing so this year can possibly help reduce your tax bill sooner.


Every business is different and taxes are complicated. It's best to speak with your CPA to see if or how this technique applies to you.


Bonus: Reflect on the Year

The end of the year is a natural time of reflection. How'd the year go for you both personally and financially? Give some thought as to how this past year went and what you hope to accomplish in the next. Consider mapping out your goals for the upcoming year, attaching budgets to those goals, and get a head start on the New Year resolutions. If you need help, think about hiring a financial planner to help get you on track and keep you accountable now and into the New Year.


Happy Holidays!


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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