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Action Items to Optimize Taxes this Year

Action Items to Optimize Taxes this Year

The tax code has changed significantly for 2018 and some old tax savings tricks are even more important.  You still have time to make significant planning actions to optimize your taxes this year.

Itemized Deductions vs Standard Deduction

You may have heard that many taxpayers will take the standard deduction for 2018 rather than itemize deductions such as medical expenses, taxes, interest and contributions.  It is true that the standard deduction almost doubled to $24,000 for Married Filing Joint and $12,000 for single filers and combined with the limit on state and local taxes (SALT) you may find that your itemized deductions are lower than the standard deduction.  

I have three recommendations for taking advantage of this change in the standard deduction:

  1. Time your charitable contributions into one year so that your contributions are high and low.  This is called bunching deductions. You can then take the standard deduction one year and itemize the next.  If you regularly pay tithes to your church or contribute to your favor charities, you may not want to actually pay these charities two years worth of contributions all in one year.  The solution is to use Donor Advised Funds.  

Donor Advised Funds are accounts that you open with your favorite brokerage company.  You can transfer funds into these accounts in one year and take the deduction in that year.  You don’t have to pay the charities until you are ready. This allows you to take a deduction this year and then spread out your contributions over two or more years.  

Vanguard, Fidelity, Charles Schwab and others manage Donor Advised Funds (DAF).  Here is info from the Schwab web site:

A Schwab Charitable donor-advised fund account offers a uniquely flexible way to manage your charitable giving. With this account, you can:

  • Realize same-year tax benefits
  • Contribute cash or appreciated non-cash assets1 and securities to possibly eliminate capital gains taxes upon sale
  • Give when it is convenient and meets your charitable goals
  • Manage your giving online
  • Create a lasting charitable legacy

One of the best benefits of the Donor Advised Funds is that you can gift appreciated stock or mutual funds and not pay any of the capital gains taxes.  Yes, you get to avoid paying tax on the gain and you get to deduct the full fair market value of those funds as charitable contributions!  Win, win!

The Schwab DAF has a minimum of $5,000 and .6% fee on the assets in the account.  Vanguard has a minimum of $25,000 for a DAF.

2.  If you are over 70 ½ and you have an IRA account you should use a Qualified Charitable Distribution(QCD).  Using the QCD is a tax smart strategy that allows you to transfer funds from your IRA directly to a qualified charity. Ask your brokerage firm how to facilitate the transfer because it must go directly to the charity.  The QCD allows you to reduce your income even if you don’t itemize. You also reduce AGI which affects taxation of Social Security Income and cost of Medicare Premiums.

Any amount you use for a QCD counts toward your RMD requirement and you won’t pay tax on the distribution.   But, be sure to tell us (your tax preparer) that you did the QCD because your 1099-R will show as a regular taxable distribution.  You also must get a receipt from the charity to substantiate the contribution.

3.  Have you completed open enrollment for your health insurance coverage in 2019?  If you are covered by a high deductible plan, you can take advantage of the HSA.  For 2018 the annual contribution limit that single individuals with HDHP medical coverage can contribute to a health saving account is $3,450 and $6,900 for families and couples.  You can deduct these contributions to reduce AGI, which allows you to get a tax benefit for your out of pocket medical expenses.  You leave the funds in your HSA until you have out of pocket medical expenses. If you don’t use all the amounts for medical expenses you can let the amounts stay in your HSA and earn interest.  

Here is a link to my favorite podcast about the Triple Tax Savings of HSA