While you don’t have to completely “true up” your taxes for 2018 until you file by mid-April, you need to get pretty close to avoid paying Uncle Sam a penalty on top of those taxes. There are three basic tests — known as “safe harbor” tests — that let you know how close you need to get based on your personal situation. You need to meet at least one of those tests to avoid a penalty, and if you meet the test through withholding, you’re good as long as the withholding takes place by Dec. 31.
Those safe harbor tests are as follows:
There are limits on the amount you can invest inside your employer-sponsored retirement plan each year. For 2018, the standard limit is $18,500, and employees 50 or older can contribute an extra $6,000, for a total of $24,500. There are generally tighter limits if you’re considered a highly compensated employee, with those limits typically starting at a $120,000 salary.
You generally need to contribute to your plan by Dec. 31 to have it count for the year, and once your window closes, you lose the ability to contribute for the year. It’s important to get your money in on time if you want to take advantage of the tax-advantaged compounding those plans allow, as well as any employer match you might otherwise be missing out on. Harvest any capital losses you plan to realize
While nobody likes seeing investment losses, they can help offset your gains within the year. Indeed, they can even offset up to $3,000 of ordinary income if you’re claiming a net capital loss across the year.
Key to remember, though, is that you can’t sell a stock and immediately buy it back to book the loss. You can’t re-purchase within the window starting 30 days before you sell until 30 days after you sell, or else you’ll be stuck with a wash sale and won’t be able to claim the loss.
As a result, a good general rule is to not sell just to capture a loss. Instead, look for potential losses to harvest among companies where you no longer believe in your initial investing thesis.
Once you reach age 70 1/2, you’re required to start taking money out of traditional IRAs and most company-sponsored retirement plans. Other than the distribution for the year you turn 70 1/2, when you have until the end of the next year to take it, you must take your distribution by the end of the year. If you don’t take the distribution on time, you’re subject to a whopping 50% penalty on the amount you should have taken but didn’t.
Those RMDs may start out pretty small, but if you have a decent nest egg in your traditional retirement plans, they can quickly grow. Not only will you probably pay taxes directly on those RMDs, but they could also force more of your Social Security to be taxable and drive your Medicare Part B premiums higher as well.
As a result, it may make sense to start converting your traditional retirement plans to a Roth IRA before you reach that RMD stage. Sure, you’ll pay taxes on the conversion, but it could save you even more taxes and costs later by keeping those RMDs down. If you’re going to make that conversion in 2018, however, you’d better get a move on, as the conversion has to complete by Dec. 31 to count for this year.
If you itemize your deductions, donating to your favorite charity or charities by the end of the calendar year will both allow you to improve your impact for them and probably reduce your taxes as well. Up to 50% of your adjusted gross income can be deductible if given as donations to typical charities.
In 2018 and 2019, any person can give any other person up to $15,000 without having to count the gift against your lifetime gift exemption. If you’re looking for a way to transfer money to your children well before you die or to help them get started in life, such as with down payment help for a new house, you can simply give them gifts.
The $15,000 is an annual limit from person to person — so you can give your child up to $15,000 and your spouse can also give that same child up to $15,000. If your child is married, you can each also give a $15,000 gift to your child’s spouse. So that’s a total of $60,000 that can be transferred from couple to couple this year, without any filing of paperwork or a hit against your lifetime limit.
If you have property taxes due in 2019 that you have already been billed for, you can pay those taxes in 2018 and potentially deduct them against your 2018 income. Note, though, that the Tax Cuts and Jobs Act limits state and local tax deductions to $10,000 in 2018 and beyond, so this exercise may not be quite as worthwhile as it used to be.
Money you sock away in a 529 savings plan can grow tax free for use for qualifying educational purposes, such as for college tuition for your children. While there’s no federal tax deduction for contributing to the plans, many states offer state tax deductions for residents who contribute to that particular state’s plan. Some states have recently increased the amount that can be deducted, so if you’ve been contributing based on old limits, now may be a good time to adjust.
If you have a flexible spending account to help you with your medical expenses, those plans have “use it or lose it” provisions that mean you forfeit any money you don’t spend by the end of the year. While plans may have carryover or grace-period provisions that let you spend some of that money next year, they don’t have to, and those provisions are very limited if they’re available at all. As a result, if you have money you have to spend, now would be a great time to consider qualifying medical purchases that aren’t strictly necessary but which you can buy with funds from your FSA.
Good luck in April. If you need help, you know where to find me.
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