We’re all still adjusting to the Tax Cuts and Jobs Act of 2017, the new tax plan that overhauled tax brackets for individuals as well as many standard deductions and exemptions.
Some investors made significant; i.e., costly, mistakes last year because of changes in the law. No need for that to happen again. Even with this new tax plan in place, there are strategies you can use to help keep your tax bill down.
Here are five ideas:
Consider increasing your retirement savings. Contributions to a tax-deferred retirement savings account reduce adjusted gross income (AGI) as long as they are within the designated limits. So, depending on your age and adjusted income, increasing retirement savings might reduce your tax bill. You have until April 19 to make an IRA contribution for the 2018 tax year.
Take a look at your charitable contributions. If you itemize your deductions, the new tax law allows you to deduct the full amount of your cash contributions to charity, as long as the deduction does not exceed 60 percent of your AGI. Any contributions exceeding the AGI limits can be carried forward and applied over the next few years. This could have a positive effect for you. Allowing for a higher tax deduction as a percent of AGI could contribute to a lower tax bill. This tip especially makes sense for those of you who itemize. The new tax law standard deduction nearly doubles the deduction amount to $12,000 for single taxpayers and $24,000 for married couples who file jointly. As a result, fewer taxpayers are expected to itemize on their 2018 return.
Speaking of charitable giving, open a Donor-Advised Fund. Putting your money or other assets, such as stocks or personal property, in a Donor-Advised fund allows you to deduct the entire contribution in the year you make it and decide later how you want to dole it out to charities of your choice. Contributing one lump sum this year might help lift your deductions above the amount of the new standard deduction and allow you to itemize.
Protect your Social Security benefits. If you are receiving social security benefits, you might have to pay taxes on them if your combined income — which is primarily your AGI plus any tax-exempt interest income plus half of your Social Security benefits — exceeds certain levels. To protect your benefits, watch the amount of interest you receive from municipal bonds. In addition, you might want to delay discretionary taxable distributions from a retirement plan.
Lastly, consider converting some or all of your money from a traditional IRA to a Roth IRA, which is totally acceptable under the new tax law regardless of your AGI. You’ll pay taxes on the conversion (minus any portion that represents nondeductible IRA contributions), but the money will grow tax-free in the Roth after that. There are other advantages as well. The converted assets can be withdrawn tax-free at any time after 5 years, and you are not required to take any minimum distributions in retirement.
No matter what strategies you use to keep your tax bill down, it is important to remember that portfolio tracking software (and talking to a financial advisor you trust, of course) will help. Also keep in mind that though the tax code continues to evolve, your goals and risk tolerance, not just the income tax impact of your investments, should drive your investment decisions.