To get a jumpstart on your taxes this filing season, there are some proactive steps taxpayers can take now to help reduce liabilities. But time is running out.
IRS audit defense firm TaxAudit compiled a list of key ways to take advantage of the Tax Cuts and Jobs Act – signed into law about one year ago – which overhauled the U.S. tax code.
According to the firm, here are five steps filers should consider before year end:
Finalize divorce papers
The big tax issue for a couple considering divorce is the change in the deductibility of alimony payments. As stipulated under the Tax Cuts and Jobs Act, beginning in 2019 the payer will no longer be able to deduct alimony and the recipient won’t have to include it as income. Because the payer is generally in a higher tax bracket than the payee, the deduction helped reduce this individual’s taxable income.
That creates less incentive for the higher-earning spouse to pay alimony.
However, the law only applies to divorces finalized in 2019, so speeding up the process for completion in 2018 would preserve the status quo for deductions.
Revisit your investments
The end of the year is always a good time for investors to evaluate their portfolios and investment allocations.
TaxAudit also recommends investors that have sold stocks at a profit this year consider a strategy known as “harvesting losses” in order to minimize tax liabilities. Under the method, investors sell poorly performing assets – worth less than what was paid for them – before year’s end to offset taxes on gains.
There are certain risks involved and rules that investors need to follow to correctly to implement this strategy, so consult a financial advisor to help weigh your options.
Pay off home equity line of credit
The experts at TaxAudit recommend paying off your home equity line of credit, or HELOC, before the end of the year because interest is no longer deductible under certain circumstances.
HELOC money put toward anything other than home improvement is not deductible under the new law. For example, according to the IRS, interest on a home equity line of credit used to build an addition to an existing home is generally deductible, but interest used to pay off credit card debt is not.
Instead of looking at taxes year-by-year, experts have said it could be beneficial under the new tax law to take a multi-year approach.
The Tax Cuts and Jobs Act doubled the standard deduction, which means fewer people will benefit from itemizing. But “bunching” can allow taxpayers to do both.
An individual could take the standard deduction in 2018, and then pile a bunch of 2018 and 2020 expenses to come up with $30,000 worth of itemized deductions in the following year. For example, a taxpayer could opt to pay her mortgage or make her charitable contributions on January 1, as opposed to Dec. 31, to shift around liabilities.
Revisit your retirement plans
At the end of every year, experts say it is worthwhile to make sure you are putting as much into your retirement account as possible.
It is also important to note that the IRS increased contribution limits for retirement accounts in 2019: Those with a 401(k) will be able to store away $19,000, an additional $500.
For an IRA, the limit was raised to $6,000 from $5,500.