7 Ways to Reduce Tax Liability
- Seven strategies which could reduce the taxes you will pay on your tax return.
- Passage of the 2017 Tax Cuts and Jobs Act resulted in changes in tax brackets.
- Many who normally receive refunds may unexpectedly owe the IRS on their next return.
- Reducing taxable income is one strategy to deal with the impact of the new tax laws.
Would you like to pay less in taxes next year? With the end of the calendar year fast approaching, now is the time to consider ways to both save taxes and enhance your investment portfolio in the new year.
Remember that the 2018 federal tax brackets were changed when the Tax Cuts and Jobs Act passed, and this could have a big impact on some university professionals. Check with your financial adviser or tax expert so you understand what to expect, and to determine if the following ideas are a good fit for your situation.
1. Max out your 403(b) contributions
The most you can save in a 403(b) plan this year is $18,500, with one caveat. If you are age 50 or older, you are eligible for a “catch-up” contribution of an additional $6,000. Be aware that this is done through payroll deduction, so you’ll need to make some withholding changes with your payroll office. If you have the flexibility in your paycheck to max out your contribution, it is a great option to reduce tax liability. (Of course, 403(b) contributions are tax-deferred.)
2. Consider supplemental benefit plans
If you’ve maxed out your 403(b), you may have the option of contributing to a supplemental retirement plan like a 457(b) plan. Contribution limits for a 457(b) plan at state and some public universities mirror those of a 403(b): $18,500, with the option of a “catch-up” contribution of up to $6,000 if you are age 50 or older. If your university offers you the chance to contribute to both, you could tax-defer as much as $37,000 if you are under age 50, and $49,000 if you are 50 or older. (Contribution limits for supplemental plans at private universities vary.)
3. Perform tax-loss harvesting
This is achieved by selling an investment which is trading at a considerable loss and replacing it with a similar, though not identical, investment. This allows you to retain the risk and return aspects of your portfolio, while also generating losses that can be used to reduce taxes. Do this before the end of the calendar year to realize the benefits during tax year 2018.
4. Wait to sell your investment winners
Capital gains realized by cashing out one year or less after purchase of the asset are considered short-term, and are taxed at the same rate as regular income. If you wait more than a year from acquisition to cash out your asset, the tax benefits are considerable. These tax rates on capital gains are for joint filers:
- 0% tax for total taxable income of up to $77,200
- 15% tax for total taxable income between $77,201 and $479,000
- 20% tax for total taxable income of $479,001 and up
5. Charitable gifting
Ask your financial adviser about a donor-advised fund, which can be viewed as a savings account for charities. Instead of contributing yearly to a charity, you can instead deposit the amount of money you might donate over the next several years now into a donor-advised fund and earn the cumulative tax deduction benefit during that one year. While doing that, you retain the flexibility to spread the donations over many years. This is important to consider in light of changes in the standard deductions and itemized deductions in the new tax laws.
6. Check your payroll withholding
As part of the tax law reform passed last December, the IRS issued new recommendations to employers regarding how much they should be withholding from employees’ paychecks. You may have noticed a change in the amount of your check early this year – perhaps small enough that you didn’t bother to investigate the reason why. Some of our clients who normally anticipate tax refunds have learned that this change means they may actually owe taxes when they file in 2019. If you’re expecting a refund, you should check with your financial adviser or accountant to determine if this change will mean a big difference for you.
7. Your situation is unique
These methods are generic, and may apply to you. However, everyone is different, so it is important to implement methods that are tailored to your situation. With the new tax laws in mind, the strategy of utilizing standard deductions and itemized deductions on your tax returns in alternating years might be a good fit for you. There are a lot of new opportunities with the new tax laws, so check with your financial adviser or tax expert on which ideas will work best for your unique circumstances.
Circular 230 Disclosure
We are required by Treasury Regulations (Circular 230) to inform the readers of this material that, to the extent that the information contained herein concerns federal or state tax issues, such information was not written or intended to be used, an cannot be used, for (1) avoiding federal or state tax penalties or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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