It’s almost Tax Day! But don’t despair; there still may be time to make some moves that will save taxes for your 2018 tax year. Here are five tax-saving ideas to consider.
1. Choose to Deduct State and Local Sales Taxes
If you live in a jurisdiction with low or no personal income tax or you owe little or nothing to the state and local income tax collectors, you might consider deducting state sales taxes instead of state income taxes. However, this option only applies if you have enough itemized deductions to exceed your allowable standard deduction. (See “Itemizing vs. Taking the Standard Deduction” below.)
If you can benefit from choosing the sales tax option, you have two options to calculate your allowable sales tax deduction:
- Add up the actual sales tax amounts from 2018 receipts, or
- Use the amount from IRS tables based on your income, family size and state of residence.
You can deduct the larger of these two amounts. But remember, your deduction for all state and local taxes (including property taxes and income or sales taxes) is limited to only $10,000 (or $5,000 for married people who file separate returns).
Important: If you use the IRS tables, you can add on actual sales tax amounts from major purchases. Examples include purchases of motor vehicles (including motorcycles, off-road vehicles and RVs), boats, aircraft and home improvements. In other words, you can deduct actual sales taxes for these major purchases on top of the predetermined amount from the IRS table.
2. Claim an Itemized Deduction for Medical Costs
If you itemize deductions for 2018, you can potentially claim a deduction for qualifying medical expenses, including premiums for private health insurance coverage and premiums for Medicare health insurance.
The catch is that your total qualifying medical expenses must exceed 7.5% of your adjusted gross income (AGI) for the 2018 tax year. For 2019, the deduction threshold is scheduled to rise to 10% of AGI unless Congress extends the 7.5%-of-AGI deal.
Key Point: If you’re self-employed or an S corporation shareholder-employee, you can probably claim an above-the-line deduction for your health insurance premiums, including Medicare premiums. In this case, you don’t need to itemize to get the tax-saving benefit of deducting health insurance premiums.
3. Make a Deductible HSA Contribution
If you had qualifying high-deductible health insurance coverage last year, you can make a deductible contribution to a Health Savings Account (HSA) of up to $3,450 for self-only coverage or up to $6,900 for family coverage. For 2018, a high-deductible policy is defined as one with a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage.
If you’re eligible to make an HSA contribution for last year, the deadline to open an account and make a deductible contribution for your 2018 tax year is generally April 15, 2019. However, for taxpayers in Massachusetts and Maine, the deadline is April 17 due to holidays. (April 15 is Patriots’ Day in Maine and Massachusetts; April 16 is Emancipation Day in Washington, D.C., where the IRS is located.)
The write-off for HSA contributions is an above-the-line deduction. That means you can take it even if you don’t itemize. In addition, this privilege isn’t phased out based on your income level. Even billionaires can contribute to an HSA if they have qualifying high-deductible health insurance coverage and meet the other eligibility requirements.
4. Make a Deductible IRA Contribution
If you qualify and haven’t yet made a deductible traditional IRA contribution for the 2018 tax year, you can do so between now and April 15 and claim the resulting write-off on your 2018 return. Qualifying taxpayers can potentially make a deductible contribution of up to $5,500 or up to $6,500 if they’re 50 or older as of December 31, 2018. If you’re married, your spouse can also make a deductible IRA contribution.
However, there are a few caveats. You must have enough 2018 earned income to equal or exceed your IRA contributions for the tax year. If you’re married, either you or your spouse (or both) can provide the necessary earned income. In addition, deductible IRA contributions are phased out based on your income level and participation in tax-favored retirement plans last year. (See “Ground Rules for Deductible IRA Contributions” below.)
5. Make Charitable Donations from Your IRA to Replace Taxable RMDs
After reaching age 70½, you can make cash donations to IRS-approved charities out of your IRA. These qualified charitable distributions (QCDs) aren’t like garden-variety charitable donations. You can’t claim itemized deductions for them, but that’s OK. The tax-free treatment of QCDs equates to a deduction, because you’ll never be taxed on those amounts.
If you inherited an IRA from a deceased original account owner and you’re at least 70½, you can use the QCD strategy with the inherited account, too.
There’s a $100,000 limit on total QCDs each year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit.
QCDs taken from traditional IRAs count as distributions for purposes of the required minimum distribution (RMD) rules. Therefore, you can arrange to donate all or part of your annual RMD amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay taxes on.
There’s still time to implement the QCD strategy for the 2018 tax year if you turned 70½ last year and haven’t yet taken your initial IRA RMD. You have until April 1 of the year after you turn 70½ to take your first RMD. If you miss the April 1 deadline, you’ll face a 50% penalty on any shortfall.
Important: If you take your first RMD on or before April 1, 2019, you also must take another RMD for the 2019 tax year by December 31 of this year. In this situation, not taking advantage of the QCD option to fulfill your 2018 and 2019 RMD obligations would mean having to take two taxable RMDs this year. However, if you use the QCD strategy, you can replace those taxable RMDs with tax-free QCDs.
Ground Rules for Deductible IRA Contributions
Do you qualify to make a deductible contribution to your traditional IRA for 2018? Here are requirements:
- You must have 2018 earned income at least equal to what you contribute for the 2018 tax year. If you’re married and file a joint return, earned income can come from you and/or your spouse.
- If you’re unmarried and in 2018 participated in a tax-favored retirement plan—such as an employer-sponsored plan or a self-employed plan like a SEP or SIMPLE IRA—your eligibility to make a deductible IRA contribution for last year is phased out between adjusted gross income (AGI) of $63,000 and $73,000. AGI includes all taxable income items and selected deductions for such items as self-employed health insurance premiums, Health Savings Account (HSA) contributions and alimony paid under pre-2019 divorce agreements.
- If you’re married and both you and your spouse participated in retirement plans in 2018, your eligibility (and your spouse’s eligibility) to make a deductible contribution for last year is phased out between joint AGI of $101,000 and $121,000.
- If you’re married and only one spouse participated in a plan in 2018, the participating spouse’s eligibility to make a deductible contribution for last year is phased out between joint AGI of $101,000 and $121,000. The nonparticipating spouse’s eligibility is phased out between joint AGI of $189,000 and $199,000.
- If you’re unmarried and did not participate in a plan last year, AGI isn’t an issue. You can make a fully deductible contribution, assuming you have enough earned income to cover it.
- If you’re married and neither you nor your spouse participated in a plan last year, you can both make fully deductible contributions, assuming you have enough earned income to cover them.
Finally, you can’t make a deductible contribution to a traditional IRA for the 2018 tax year if you were age 70½ or older on December 31, 2018.
Itemizing vs. Taking the Standard Deduction
Under the Tax Cuts and Jobs Act (TCJA), fewer people will be itemizing deductions—and more will be claiming the standard deduction—for the 2018 through 2025 tax years. Why?
First, the TCJA almost doubled the standard deduction amounts:
Standard Deduction for 2018 and 2019
|Single filers and married people who file separately||$12,000||$12,200|
|Heads of households||$18,000||$18,350|
|Married people who file jointly||$24,000||$24,400|
These amounts will be adjusted annually for inflation. If you’re 65 or older, you’re entitled to slightly higher standard deduction amounts. After 2025, standard deductions are scheduled to return to pre-TCJA levels.
Another reason that fewer people will itemize deductions is that the TCJA limits itemized deductions for all categories of state and local taxes to $10,000 combined (or $5,000 if you’re married and file separate returns). For people in high-tax states or with sizable income and property tax bills, this limitation can significantly lower itemized deductions for 2018 through 2025.
Your SSB tax advisor can help determine whether it makes more sense for you to itemize deductions or take the standard deduction for 2018. For some taxpayers, it may be advantageous to “bunch” itemizable deductions in alternating years and then take the standard deduction in between.
These are some of the more widely available last-minute tax-saving maneuvers that you should consider before Tax Day. Contact your SSB tax advisor to determine whether these or any other last-minute strategies might work for your specific situation.