20 Tax Saving Strategies for Individuals

Sell Losing Investments (Loss Harvesting)

You can sell stocks or other investments that have lost money through a strategy called loss harvesting. The capital loss from the sale of the losing investments can be used to offset capital gains.

Under the new tax law, you can use up to $3,000 of the capital loss per year to offset the ordinary income.

Review your investments with a tax accountant or tax planner to make sure you are taking advantage of loss harvesting.

Roth IRAs conversion

Roth IRAs allow your money to grow tax free and unlike the traditional IRAs you don’t pay taxes when you make withdrawals from Roth IRAs.

With Roth IRAs conversion tax saving strategy, you can convert all or some of the amounts you have on traditional IRAs to a Roth IRA. The amount converted to Roth is taxable during the year of conversion.

Having tax planning advise from a trusted tax accountant can help you determine whether converting Traditional IRA to Roth IRA is good for you. A great tax accountant will run the numbers to determine your tax brackets for the current year and for the future years and advise you when is the best time to make the Roth conversion. Essentially, you save taxes on the Roth IRAs conversion in the long run.

The Tax Cuts and Jobs Act removed the ability to recharacterize a Roth conversion to a traditional IRA.

Make Estate Plans with Tax-Free Gifts

An estate tax is a transfer tax paid on an heir’s inherited share of an estate when the value of the deceased estate exceeds exclusion limit set by law. Estate tax does not apply to the transfer of assets to a surviving spouse.

Estate tax can be high so thoughtful estate planning is advisable if you want to leave a substantial asset to your beneficiaries or heirs without subjecting them to high estate taxes that they cannot afford to pay.

The Tax Cuts and Jobs Acts (TCJA) expanded the lifetime gift and estate tax exemption from $ 5.6 million in 2017 to $ 11.2 million in 2018. Which means that wealthy taxpayers who had maxed their lifetime gift can now give $ 5.6 million without paying taxes on the additional gift.

Deceased estate left to the heirs can use $11.2 million tax exemption. The exemption is set to sunset after 2025. However, it remains uncertain what will happen after those who made the large gifts but are still alive.

If an estate has a combined gross assets and prior taxable gifts in excess of $ 11.2 million, it is required to file a federal estate tax return and pay estate taxes.

Gift Taxes applies when you give more than the exclusion limit set by the law. For 2018, you can give $15,000 per year per person as a tax-free gift.

What the Difference Between Estate Tax and Inheritance Tax?

An estate tax is tax paid on the estate before the assets is distributed to the beneficiaries. Federal government only impose estate tax and does not collect inheritance tax.
An inheritance tax is tax paid on the inherited share of the assets. This is imposed at the state level. Each heir may pay different amounts of inheritance taxes depending on how much is inherited and the state of residence. States like Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania still have inheritance taxes. Laws varies in each state so is advisable to speak with a tax accountant or attorney.

Choose the Right Business Structure

The Tax Cuts and Jobs Acts (TCJA) also impacted how businesses are taxed. Corporate tax rates were slash from 35% to 21% probably making incorporated business less expensive option for the business owners. Certain pass through entities – partnerships and LLCs also received a tax break.

Consulting with a good tax accountant can help you choose the right business structure that could save you taxes and put more money to your business.

20% Deduction on Qualified Business Income

The new tax provision provides a 20% deduction on qualified business income. If you own a sole proprietor, LLC, Partnership, or S. Corporation and have a pass-through income you might be able to reduce your taxable income with 20 % deduction on qualified business income.

The calculation of 20% deduction on qualified business income is not straight forward but very complex and is limited based on taxable income and the type of trade or business income. For example, to take the full deduction your taxable income must be below $ 157, 500 if single or $315,000 if married.

Consults a tax accountant to find whether you qualify for this deduction.

Make required minimum distributions

The IRS rules require taxpayer who are 70 ½ years old to start taking mandatory withdrawals from their IRAs or 401(k)s. However, you are not required to take mandatory withdrawals from Roth IRAs.

If you do not take the required distributions you may pay a 50% excise tax on the amount not distributed as required.

If over age 70, speak with a financial planner or a tax accountant who will advise you how much you are required to withdraw and when you should start taking the required withdrawals.

Social Security for Retirees

Part of social security benefits might be taxable. Proper strategy can help you prevent paying any taxes for the money you receive from social security benefits.

Sum up all your income from all sources and then add half of the social security benefits. If the amount is more than $ 25,000 for single or $ 32,000 for joint filers you probably owe taxes on a portion of social security. You can save on taxes by strategically timing when you should receive the social security benefits and taxable withdrawals from pension, IRAs and 401(K).

Home Equity Loan

The Tax Cuts and Jobs Acts (TCJA) took away the mortgage interest deduction for home equity loans. Which means taxpayer with home equity loan will no longer take advantage of the interest deduction.

However, there is an exception if the amount received from the home equity loan is used to buy, build or improve your home, in this case the interest is deductible. If you have both mortgage and home equity, is advisable to pay off the home equity loan unless the mortgage interest is much higher.

Relocate to Lower-tax State

The tax reform limited the deduction you can take for state, property and local taxes. If you live in a state where a combination of property, local and state taxes is high you are now limited on how much you can take as a deduction. The maximum deduction is now $ 10,000. Choosing to move to a lower-tax state can lead you to make a tax saving decision.

If you are planning to move, review your situation with a tax accountant or a tax planner to determine whether moving to lower-tax state is good for you.

Take Advantage of a Flexible Spending Plan at Work

Flexible Spending Accounts (FSAs) allows you to pay for qualified dependent care and medical expenses with tax free dollar. Most employer offer FSA plans where you authorize your employer to withhold a specified amount from your paycheck and deposit the amount in an FSA account. After you incur the qualified child and dependent care expenses you submit a claim to your employer for reimbursement. Your employer will require copies of receipts or proof of payment.

For your claim to be reimbursed, the receipts must include the following:

The date the expense is incurred
The amount incurred
The Full name, address and tax identification number of the person or organization that provided the care.

Tax Saving

The amount deposited in the FSA account and used for qualified medical and dependent care expenses is excluded from taxable income. For example, if you are in the 24% tax bracket and you have spent $ 2,000 on qualified child and dependent care you may save up to $500 in federal income taxes

Limits:

Each year the IRS limits the amount that you can contribute to FSA.

2019 FSA Contribution Limits:

Health FSA $ 2,700
Dependent Care FSA $ 5,000

Use or lose it

The contribution to your FSA must be used by the end of the plan year. However, your employer may provide 2 ½ months grace period for you to use all the money in FSA account or may allow you to carryover $500 per year of unused funds. After the grace period expires, you lose any unused funds.

Careful planning for FSA contribution is necessary so it is advisable to speak with an accountant or financial planner ahead of time.

If Eligible, Take Advantage of Health Savings Account

A Health Savings Account (HSA) allows you to save money on a tax favored basis for qualified healthcare expenses. HSAs are great if you wish to limit current healthcare costs and save for future expenses.

Healthy young people on budgets and wealthy families who can afford the deductibles and easily save $ 7,000 per year in a tax-favored HSAs can benefit from taking advantage of HSAs.

Eligibility:

You are eligible to open and contribute to HSA if you are:

Covered under High-Deductible Health Plan (HDHP) on the first day of the month
Not covered by any other non-HDHP plan
Not enrolled in Medicare
Not claimed as a dependent on someone else’s tax return

If you qualify for HSAs you may benefit from a huge tax saving. In 2018 you can put $ 3,450 for yourself and $6,900 for family coverage and in 2019 you can contribute $3,500 for yourself and $ 7,000 for family. And if you are age 55 or older by the end of the tax year, you can add up to $ 1,000 catch-up contribution.

The contributions are deductible on your taxes and you do not pay taxes on investment income or gains when the money is used for qualifying healthcare expenses.

Contributions to HSAs can be made throughout the calendar year and up to April 15 following the tax year.

Setting up a Health Savings Account

The first thing is to make sure you are enrolled in a HDHP either through your employer of through your own business. Once you are enrolled to HDHP, contact your financial institution to open an HSA saving account. The enrolment process is quick and simple. This including completing application and funding your account.

You may set up HSA account with you as the sole beneficiary or for you, your spouse and or dependent as the beneficiaries.

Save with Tax-favored Retirement Plan

Take advantage of the employer provided retirement plans and build fund for your retirement. Each month your employer can save part of your wages to a retirement plan and make an employer contribution. The contribution made to the retirement accounts are tax-free and are only taxed when withdrawn.

In 2018, you can make a salary deferral of up to $ 18,500 or $ 24,500 if you are over age 50.
If you participate in a profit-sharing contribution plan, up to 25 percent of W-2 earnings can be contributed to a 401(k) plan. For 2018, maximum compensation for purposes of this calculation is $270,500 (IRC 401(a) (17)).
If you are sole proprietorships, partnerships, or an LLC taxed as a sole proprietorship the salary deferral contribution for 2018 is 100 percent of net self-employment income less 50 percent of self-employment tax, up to the maximum of $18,500 or $24,500 if over age 50 can be contributed to a 401(k) plan.

Over 50, Make use of Catch-up Contribution

IRAs, and 401(k)s, allows you to make special catch-up contributions once you reach a certain age. If you are over age 50 you can make an additional $1,000 to the maximum IRA contribution and $6,000 to the maximum 401(k) contribution. Also, those over 55 can add another $1,000 to their HSAs. This special catch up contribution allow you to maximum your retirement as you approach retirement age, so take advantage of it if you can.

Contribute to an IRA

Individual Retirement Account (IRA) still provide valuable tax benefits. If you have not maxed out, you can still make the contribution on or before the tax filing date. The maximum contribution for 2018 is $5,500 and if you are over age 50 you can contribute an additional $1,000. Also, if you or your spouse participates in an employer retirement plan, the dollar limit of your IRA deduction is reduced depending on the amount of your adjusted gross income and phase-out level.

The contributions you make are not taxed when you make contributions and the earnings grow tax free. At age 59 ½ you can withdraw money from IRA and pay taxes on the distributions. It is advisable to speak with a tax accountant or financial planner before funding your IRA accounts to see if any limitations apply to you.

When to Establish IRA Accounts

You can open an IRA Account and make deductible contributions by the due date of the return (without extensions) for the year the deduction will be claimed.

Penalty on early withdrawals

You pay 10 percent penalty when amounts in IRA is withdrawn before age 59½ except on account of disability, death, or other exceptions noted below.

1. Higher education exception

You are exempted from the 10 percent tax on early withdrawals from an IRA if the distributions are used to pay for “qualified higher education expenses” of the taxpayer, the taxpayer’s spouse, or the couple’s children or grandchildren. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at a higher education institution.

2. First-time home buyer exception

You are also exempted from paying the 10 percent tax on early withdrawals when the distributions are used to pay expenses incurred by qualified first-time home buyers, up to the first $10,000.

Qualified distributions are those made during the taxpayer’s lifetime that are used within 120 days of withdrawal to buy, build, or rebuild a first home that is the principal residence of the taxpayer, the taxpayer’s spouse, or any child, grandchild, or ancestor. To be a first-time home buyer, the taxpayer (and spouse, if married) must not have had an ownership interest in a principal residence during a two-year period ending on the date the new home is acquired [Section 72(t)(2)(F)].

3. Medical and health insurance exceptions

You are exempted from paying the 10 percent additional tax on early distributions when the distributions that are used to pay medical expenses in excess of 7.5 percent of AGI (the deduction floor for 2018). Also, for payment of health insurance premiums after separation from employment. To qualify, you must have received unemployment compensation for 12 consecutive weeks, and the distributions must be made during a tax year in which the unemployment compensation is paid or during the next tax year.

This exception does not apply to distributions made after an individual’s reemployment if he has been reemployed for at least 60 days after the separation from employment. A self-employed person is deemed to meet the requirements for unemployment compensation if he would have received the compensation except for the fact that he was self-employed [Section 72(t)(2)(D), and (t)(2)(B)].

4. IRS levies

A distribution from IRAs due to an IRS levy are not subject to the 10 percent early distribution penalty.

If you wish to pay back taxes from an IRA account, you may request the IRS to levy the IRA account. However, if you remove the money from IRA to pay back taxes, you will be subject to the 10 percent penalty unless he is age 59 ½.

5. Charitable contributions

If you are age 70 ½ or older you may authorize distributions from an IRA directly to a public charity

[Section 408(d)(8)]. A distribution that passes directly from the IRA trustee to the charity is not

includable in gross income. Such distribution also qualifies for the required minimum distribution. The

provision was made permanent by the Protecting Americans From Tax Hikes Act of 2015.

Contribute to SIMPLE IRA Plan

A SIMPLE IRA provide significant benefits to self-employed business owners with few or no employees, and relatively low income. If you are a self-employed taxpayer who do not have any other qualified retirement plan you can contribute to SIMPLE IRA plan. You can set elective contributions for any other employee working for you and make a company match or non-elective deferrals.

For 2018, an employee(s) contribution is limited to $ 12,500 and $ 15,500 for those over age 50 and employer can make employer contribution of up to 25 percent of compensation.

When to establish SIMPLE IRA

You can establish SIMPLE IRA Plans any date between January 1 and October 1 of the taxable year. But if your self-employed business comes to existence after October 1, you can establish a SIMPLE IRA plan effective between October 1 and December 31. It always advisable to seek advice of a good tax accountant.

Coverdell Education Savings Accounts (CESAs)

Build an education fund for your children under age 18 years by contributing $ 2,000 each year to Coverdell Education Savings Accounts (CESAs) for each child. Although the contributions are taxed when made, distributions from the account are tax-free when used for qualified education expenses such as tuition, room and board, books and supplies. If the fund is not utilized for higher education expenses for the beneficiary the balance in the fund can be rolled over to another family member by age 30. Consult a tax accountant to learn at what point is the earnings subject to a 10 percent penalty and taxable, and when the contribution phase-out.

High income parents or grandparents restricted from contributing to a Coverdell Education Savings Accounts because of the AGI restrictions can make a gift of $2,000 to a student or beneficiary. The gift must be made before 18th birthday through a custodian account. The distribution can be used for qualified education expenses for K-12 and post-secondary education.

A corporations and non-profits organization can make contributions to Coverdell Education Savings Accounts (CESAs) without any restriction to income. If the contribution is made on behalf of employee dependent, it is considered a compensation income to employee.

Funding deadline

The contribution can be made to the account by April 15 of the following year.

Withdrawal of excess funding

If excess contribution is made to the account, a 6 percent excess contribution tax is imposed by Section 4973. The 6 percent penalty for excess contributions can be avoided if excess contribution and earnings are distributed to the beneficiary before the following June 1.

Saving Taxes Through 529 Plans

529 plans (Prepaid tuition plan and college saving plan) allow you to invest fund for the future education of your beneficiary. You may make contributions on behalf of a beneficiary to both a Section 529 plan and a Coverdell Education Savings Account. Both are considered gifts to the beneficiary and are subject to the annual gift exclusion rules. The earnings accumulate tax free and you do not pay taxes on the accumulated gains when the money is used for qualified educational expenses.

The 529 plan was essentially set for college education but the tax Cuts and Job Act (TCJA) expanded the plan to cover tuition for elementary and secondary school, K-12.

If you are a high-income earner or have received a wind fall, section 529 offer an additional gift tax advantage. You can use the current year plus four future years of annual gift exclusions on a single investment to 529 plans. Which means, in 2018 you can fund 529 plan with $75,000 for a beneficiary and elect to use the five years of $15,000 annual gift exclusions through making a special election (section 529(c)(2)(B)) and filing a Federal Gift Tax return, Form 709.

In case you die before the five years, the remaining gift exclusion will revert to your estate. If the beneficiary does not need the money to fund their education expenses, you can shift the remaining funds in the 529 plan to another family member.

Make a Charitable Contributions

The Tax Cuts and Job Acts (TCJA) increased the limit for charitable contributions to public charities and private foundations from 50% of adjusted gross income to 60% which means you can increase your charitable deductions.

If you have a sizable deduction and plan to itemize deductions you can donate cash, stock or property before the year end to a charitable organization. The amount or fair value of the contributed property or stock reduces your taxable income and this reduces the amount of taxes.

On the other hand, the TCJA also increased the standard deduction amounts which means if you choose to use standard deductions the tax benefit from charitable deductions is eliminated. Before the year ends speak with Tax Accountant or Financial Planner to find if giving charitable contributions will have any tax saving.

The contribution you make to individuals, social clubs and pollical groups or foreign organizations are not deductible.

A donated property of more than $250 must have a written documentation and all cash contribution must be documented proof.