December is finally here, and with the holiday season in full swing the last thing on your mind is taxes (after all, for most of us, filing taxes is a headache saved for April 15)—but follow these year-end tax tips now and you’ll thank us later when it’s time to file your 2018 taxes.
Use (or lose) your flexible spending account
Flexible spending accounts are funds where you can stash pretax dollars for qualifying medical expenses. If you have one, you would have signed up for it when you went through open enrollment at your workplace. FSAs are a great way to save if you know you're going to spend money on medical bills, dental work and other qualifying health expenses over the coming year, but they follow a "use it or lose it" policy; any funds you don't spend by the end of your plan year are forfeited. While your plan year is determined by your company, for many of us, the cut-off date for using FSA funds is Dec. 31.
In some cases, employers will extend your cut-off date to March 15, and in other cases, they'll allow you to roll over up to $500 of FSA funds into the next year, but employers aren't required to offer either of these extensions. Review your company's benefits package or contact your HR team to find out when your funds expire. Fortunately, you don't have to schedule a doctor's appointment to use your FSA money before the end of the year. FSAs also cover a lot of over-the-counter products, ranging from lip balm and sunscreen to contact lens solution and eye drops (see the full list here).
Consider appealing your home's assessment price
With President Trump's Tax Cuts and Jobs Act (TCJA) now in full swing, taxpayers can only deduct up to $10,000 in state and local taxes (SALT). In addition to income tax, SALT taxes include any property tax you pay to your state or local municipality, so most homeowners will end up paying more in SALT taxes than they can deduct.
One way to offset this loss is by appealing the assessed value of your home. If you feel that the current assessed value of your home is inflated (if, for example, your local housing market has slowed in the past 12 months), you can have the value your home reassessed and pay property taxes based on this lower amount.
Lump charitable donations together into one year
When you file your taxes, you get to write off things like taxes you've paid your state or charitable donations you've made over the past year. This requires you to maintain records and receipts of your expenses for the year, but it can save you money by lowering your taxable income.
To make things simpler, the IRS allows you to claim the standard deduction—a flat deduction amount any taxpayer can claim without any records. Claiming the standard deduction means you have to manage a lot less paperwork, but it's only worthwhile if the standard deduction amount is as much or more than the total amount you could write off by itemizing your deductions. For most taxpayers, it will be. The TCJA nearly doubled the standard deduction amount, so it won't make sense for most people to itemize their deductions in 2019.
Standard deductions for 2018 taxes
|Tax filing status||Old deduction amount||New deduction amount|
|Married Filing Jointly||$13,000||$24,000|
|Married Filing Separately||$6,500||$12,000|
|Head of Household||$9,350||$18,000|
That said, if you know you'll have high enough deductions to exceed the standard deduction amount this year, there are some tactics you can use to push yourself over the edge. One way of increasing your eligible itemized deductions for the year is by making a larger charitable donation. If you have the cash on hand to lump next year's planned donations in with this year's, you can itemize that larger deduction for 2018, then claim the standard deduction in 2019 when you have no donations to declare.
For the 2018 tax year, you can deduct donations of up to 60% of your income.
Max out your retirement accounts (or save as much as you can afford)
Any contributions you make to a traditional retirement fund, such as a traditional IRA or 401(k), lowers your taxable income for the year. These investments save you money now and will earn you more in the long run, so maxing them out is a great idea—if you can afford to. But even if you can't, contributing as much as possible will help lower your tax bill.
Retirement contribution limits
|Retirement plan||Your age||Contribution method||Annual limit|
|401(k) and 403(b)||Younger than 50||Payroll deduction||$18,500|
|401(k) and 403(b)||50 or older||Payroll deduction||$24,500|
|IRA||Younger than 50||Personal contribution||$5,500|
|IRA||50 or older||Personal contribution||$6,500|
Note: If you have a Roth retirement account, contributing more won't help lower your 2018 tax bill, since Roth contributions are made on a post-tax basis. This doesn't mean you shouldn't still max out your Roth accounts, though. The more you save now, the more you'll have tax-free in retirement. Also, if you have both Roth and traditional IRAs, the $5,500 limit applies to both of them, not each. You can't contribute $5,500 to both accounts in one year, but you can split that amount across multiple IRA accounts.
Open a 529 plan
529 plans allow you to stash away money for future education expenses. Rules and plan limits for 529 plans vary by state, but generally, you can open a plan in anybody's name—your own, a child's or even a friend's. You can't deduct contributions to a 529 plan from your federal taxes, but most states allow you to deduct a certain amount from your state taxes, and contributions are totally tax-free when the beneficiary withdraws them for education-related expenses.
In most states, the 2018 deadline for making contributions to a 529 plan is Dec. 31, so if you want to reduce your state tax bill for the year and help a loved one pay for school, open a plan now.
Unlike most states, these seven give you a little bit longer to make contributions for the 2018 tax year.
|State||529 plan contribution deadline|
|Georgia||April 15, 2019|
|Iowa||May 1, 2019|
|Mississippi||April 15, 2019|
|Oklahoma||April 15, 2019|
|Oregon||April 15, 2019|
|South Carolina||April 15, 2019|
|Wisconsin||April 15, 2019|
Have a home equity loan? Rethink your payment schedule
In the past, interest paid on home equity loans was tax-deductible, making them an attractive way for property owners to draw value out of their homes. That may have changed with the new tax law. Since interest rates for home equity loans are usually around 5.75%, it often made sense to pay them off slowly and to use spare cash for investments or to pay down higher interest debts. But under the new tax law, only qualifying home equity loans will be eligible for a tax deduction. Which loans qualify? "The interest will only be deductible if the home equity loans are used to buy, build or substantially improve the taxpayer’s home that secures the loan," said Jacob Dayan, CEO and cofounder of Community Tax. "If you use it for personal expenses like paying off credit card debt, the interest will not be tax deductible." This doesn't necessarily mean it no longer makes sense to use a home equity loan to pay off higher interest balances, such as credit card debt. It just means that home equity loans used for that purpose are now a little more expensive. Take a moment to re-evaluate your loan rate against the interest rate you're paying on any remaining debts and the return you think you could receive from your investments to decide whether you should start paying off your home equity loan ahead of schedule. If you do, you'll pay less in taxable interest over the lifetime of the loan.
Plan to file your taxes as a couple (if you're married)
Under the old tax law, there were times when married couples could actually be taxed less by filing individual instead of joint tax returns. For example, let's say you and your spouse both earn $80,000 in taxable income. Under the old law, if you both filed as individuals, the highest tax bracket either of you would be subject to would be 25%. But if you filed jointly, your combined income of $160,000 would push you up into the 28% tax bracket. For all but the wealthiest earners in the highest two tax brackets, this so-called marriage penalty has been eliminated, so middle-class married couples can file jointly without paying extra.