Have you thought about your taxes lately? Probably not, but this month is probably one of the most important months in tax planning because it’s the last time you’ll have an opportunity to effect any meaningful change to your taxes next year.
Once December ends, 2018 is essentially frozen and your taxes will be what your taxes will be. So, what sorts of tax moves should you consider making?
Sell your stock losers
Any losses you realize from the stock market, that aren’t offset by gains, can be deducted from your regular income, up to a limit of $3,000 a year. If you’ve been thinking about dumping some losers, now’s the time to do it. If you have more than $3,000 in losses, you can carry those forward indefinitely (until death). More advanced traders may also consider tax loss harvesting as an option as well.
Donate to your favorite charities
Times may be tough but they’re even tougher for charities and philanthropies, who rely on generous contributions to stay in operation. Consider donating money, goods, clothes, your car, anything – to one of your favorite charities so that they can stay operating through these difficult economic times. If you itemize your deductions, you can deduct contributions from your regular income.
Delay bonuses and income
If you can swing it, try to push any additional payments until the new year. If you are paid this year, you have to pay taxes on it in a few months. If you are paid next year, you won’t have to pay taxes on it for an extra year. If your employer withholds taxes on your bonus payments, this is a less valuable strategy.
Pay off all loans and clear credit cards
The end of one year and the start of another is the perfect time to clear off any debts, loans or outstanding credit cards you might have. Payday loans, overdrafts and all other short-term borrowings, if you can, should be reset. I know that for many this will be a pipe-dream. But if you could, wouldn’t 2019 get off to a great start? If this is a goal, put it on your list of New Year’s resolutions. Stop using short term loans you find on the Internet and start embracing a new challenge of lowering your debts and financial commitments.
Prepay state and local taxes
This one is a little tricky, if you don’t think you’ll be subject to the AMT, consider prepaying your state and local taxes. State and local taxes are federal tax deductions so prepaying them today means you can deduct them today as well.
Accelerate other deductible expenses
If you have a mortgage, consider paying next month’s payment this month. If you pay it this month, you can deduct the interest payment against this year’s income. If you pay for it on January 1st, it’ll have to wait until you file 2019 taxes. This is true of any deductible expenses you may have from student loan debt to medical to your real estate taxes. If you want, you can make the payment with a credit card and then pay off the credit card next month and still have it be deductible for 2008.
Use up your $15,000 gift exclusion
Each year, you are allowed to give $15,000 to someone else tax-free. If you give more than $15,000, then you are subject to what is known as the gift tax. It’s a little backward but it’s a page out of the estate planning book since heirs to an estate are often taxed on that estate. Anyway, if you were planning on giving someone a very generous gift, don’t forget to do it. Next year the limit stays the same at $15,000 but could change for 2020, as it has done in previous years and did do from 2017-18.
Beware buying into mutual funds with capital gains distributions
Mutual funds buy and sell stuff all year, then distribute a bit of that at the end of the year. What you won’t want to do is buy into a mutual fund that is set to make a year-end capital gains distribution because you’ll be immediately taxed on that distribution. Imagine a mutual fund that costs $100 a share. You buy it and the next day it makes a $1 per share distribution, lowering the cost per share to $99. You just bought the thing and already are on the hook for $1 per share in taxes. Boo!
Contribute to your retirement
If you aren’t maxed out on your 401(k), or similar, plan, consider doing it because each dollar contributed is entirely deductible. The 2018 contribution limit for your 401(k) is $18,500, rising to $19,000 in 2019. Another good idea is to contribute towards your IRAs but you have until April 15th to accomplish that.
Your tax filing status is based on your status as of December 31st, 11:59 PM. If you were married on December 31st, you’re considered married for the year. If that helps your tax situation, you might want to consider it.
Get everything ready
If you’re due a refund, try to get all your ducks in a row as soon as possible so the government will mail you your refund check ASAP. All you’re really waiting for is the official W-2 from your employer, which they are required to mail out by January 31st, and you should be ready to hit the e-file button.