With 2018 rapidly approaching, many taxpayers are now searching for ways to maximize their tax refunds or minimize the taxes they currently owe. Proper year-end planning can result in the solidification of a strong 2017 tax liability, putting you in generally good financial standing heading into the new year.
Here are some key tips for year-end tax planning.
In order to enact quality financial planning, you must first plan for the planning, so to speak, and this entails strong data collection. Start by gathering your prior year returns — including any losses, carryovers, estimated installments, and any items that stick out as unusual. This information will be pivotal when discussing “plans for significant purchases,” dispositions, and major life events predicted to take place during the new year.
Remembering new audit rules
One significant tax planning consideration for 2018 is the Bipartisan Budget Act (BBA). Originally passed in 2015, the BBA “provides new partnership audit rules that go into effect for tax years beginning on or after January 1, 2018.” These rules mainly strive to access and collect underpayment of taxes directly from partnerships in lieu of seeking out payment from each partner individually. In other words, the tax burden of an audit tax adjustment can fall on new partners — not necessarily on partners previously responsible for partnership interest during the audit year. Businesses and individuals in these situations should keep these notions in mind as 2018 begins.
Keeping an eye on flex plans
Flexible spending accounts, or flex plans, are fringe benefit accounts offered to employees in which funds can be steered and later tapped to pay off certain bills (usually those stemming from health and child care). These funds are able to avoid both income and social security taxes, but they also follow a “use it or lose it” system: employees must decide in advance how much they are willing to contribute to the plan, and if they do not use this money by the end of the year, it is forfeited. Therefore, it is crucial to keep a close eye on any flex plans you have invested in during 2017.
Some companies, however, allow a payment grace period where unspent funds can be used as late as March 2018, so double check to see if you have this option as you continue your tax planning.
“Loss harvesting” basically refers to the sale of investments — including stocks and mutual funds — to identify key losses and subsequently offset possible taxable gains realized during the year. If you find that your losses outweigh your gains, you can use up to $3,000 of “excess loss” to eliminate other income. Any additional excess loss can be rolled over into the new year, and losses in general can be carried over year after year for as long as you live.
Deferring and accelerating
You can exercise additional control of your year-end income by accelerating or deferring certain receipts or payments. This type of financial timing is essentially the “linchpin of year-end tax planning.” Examples of this method may include the timing of year-end bonuses, year-end tax payments, or sales of investment properties to maximize capital gains benefits.
One constructive way to accelerate deductions — especially with the holiday season approaching — is to donate to charities or other philanthropic causes.