Year-End Financial Moves to Consider

While you’re busy with Christmas planning and spending, don’t forget about making a list and checking it twice to do some financial tasks before the year ends. You’ll be glad you did.

Meeting that December 31 deadline is important when it comes to your 2018 income taxes. Sure, having those forms filed by the mid-April deadline may seem far off, but you can check off a few financial tasks by December 31. If you’re not sure what to do, check with your tax advisor.

Among year-end financial “to dos” to consider:

  1. Used those flex spending dollars? Your employer might offer a flex spending account (FSA) that you can fund annually with pre-tax dollars to pay for out-of-pocket health and medical expenses throughout the year. If you earmarked money this way, you probably need to spend it by December 31. Check with your employer to verify the deadline and see if you forfeit any unused amount or if it carries over for a period of time.
  2. Make an estimated tax payment? If you have an employer, your tax amounts are typically withheld from each paycheck because the U.S income tax system is pay-as-you-earn. But since the tax rates changed significantly this year (thanks to the Tax Cuts and Jobs Act), you may have to make an additional tax payment to avoid a penalty for underpayment to date. Or, if you have a side business or are a contract worker, you need to make sure you’ve paid enough via four quarterly estimated payments. According to IRS (Internal Revenue Service), “an estimated tax penalty will normally apply to any party that pays too little tax — generally less than 90% of the tax shown on the return for the current tax year or 100% of the tax shown on the return for the preceding tax year.” Use the IRS Paycheck CheckUp tool or refer to IRS Publication 505. (And, you may need to adjust federal tax withholding from your future paychecks by filing a new W-4. Check with your employer, usually the human resources department.)
  3. Added to a health savings account? You may be eligible to fund a health savings account (HSA) with pre-tax dollars if you have a qualifying high-deductible health insurance plan. Verify that you qualify and the amount you can contribute – IRS Pub 969 can help you.
  4. Made 529 contributions? A 529 plan is a type of account you can open to save and invest for future college costs and some states offer a tax benefit. Parents and grandparents can open and fund accounts, and each would set up his/her own and name a beneficiary (like a kid). The two types of 529 plans are: prepaid tuition plans and education savings plans. To learn about the plans and how to fund one, check out the U.S. Securities & Exchange Commission’s easy-to-understand Introduction to 529s and 10 Questions to Consider.
  5. What about an IRA contribution? According to a 2017 survey by TIAA, only about one-third (31%) of Americans have an IRA, and even fewer (19%) actively contribute to an account. An Individual Retirement Account (IRA) is a way to save and invest that may offer tax advantages. You may opt to have a regular IRA, Roth IRA, or both. To learn the pros and cons of each, check this handy IRS comparison chart and IRS Pub 590-A.
  6. Need to take an RMD – Required Minimum Distribution? If you are older than 70½ and have IRA accounts, you must calculate and withdraw the required amount annually. Getting the RMD right can be tricky, especially if you have several accounts. To avoid steep penalties, check with your financial advisor/tax team and refer to IRS Pub 590-B and the RMD worksheet.

In addition, several IRS rules have changed for filing personal income taxes for 2018.* Learn the changes affecting you, talk with your tax advisor, and check IRS Publication 5307 to see if your tax bite can be reduced. Here are a few highlights the IRS has posted:

  • Change: The tax rate (percentage you owe based on net income) has decreased for some taxpayers, and the IRS also issued new withholding amounts.

         Your move: Make sure you’ve paid 90% of your taxes already. If not, file an estimated payment. (Then, you may need to adjust federal tax withholding from your future paychecks by filing a new W-4. Check with your employer, usually the human resources department.)

  • Change: The standard deduction has doubled and is now $24,000 for a taxpayer.

     Your move: This deduction reduces the amount of income on which you are taxed. As a result of this increase to $24,000, many taxpayers will find it advantageous to take the standard deduction and not itemize. In past years, some taxpayers itemized (spelled out other expenses) to get a bigger deduction than the standard.

  • Change: You can no longer re-characterize a conversion to a Roth IRA.

    Your move: Once you transfer money from a traditional IRA, SEP IRA or SIMPLE IRA to a Roth IRA, it’s a done deal. You cannot go back and change your mind. See IRS rules here.

  • Change: The deduction and exclusion for moving expenses is suspended. 

    Your move: You cannot deduct moving expenses. Any amounts reimbursed by an employer will be considered taxable income.

  • Change: Exemptions for a taxpayer and dependents have been suspended.

    Your move: You won’t be claiming a personal exemption for yourself, your spouse, or your dependents. The increased standard deduction takes this into account.

  • Change: The child tax credit increased to $2000 per qualifying child. A new $500 credit is available for qualified dependents, unless the child tax credit applies to them.

    Your move: More families with children under 17 may qualify for the child tax credit, and dependent children over 17 may qualify for the new $500 credit. Read IRS Publication 972 for details.

  • Change: The Alternative Minimum Tax exemption amount increased.

    Your move: Read IRS Form 6251 for details.

  • Change: Treatment of alimony has changed.

    Your move: Alimony and separate maintenance payments are no longer included in income, nor reported on your tax return if the payments are based on a divorce or separation agreement executed or modified after December 31, 2018. Likewise, alimony and separate maintenance payments are not deductible for any divorce or separation agreement executed or modified after December 31, 2018.

*Be sure to read IRS Publication 5307 for explanations of changes that may affect your tax situation. As always, this blog is educational in nature and does not offer specific financial advice. Consult a tax advisor in regard to your own circumstances.


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