Following a few year-end tax planning tips might mean more money in your pocket.
After spending several days recently attending a tax conference, there were a number of strategies worth sharing that may benefit you depending on your stage in life.
This time of year is usually the open enrollment period for employee benefits. One of the more overlooked benefits is the flexible spending account (FSA), which allows employees to set aside money for medical or child care expenses on a pretax basis. In 2018, the limit for medical expenses was $2,650 while up to $5,000 could be deferred for dependent or child care expenses.
I often see this type of account confused with a health savings account (HSA), which requires a high-deductible health insurance plan. One of the main differences between these two types of accounts is the HSA balance can be carried over from one year to the next, but the FSA is a “use it or lose it” type benefit so it’s important to use the money in the account each year.
For families with children in college, one of the best tax credits available is the American Opportunity Tax Credit (AOTC), which can provide a tax credit up to $2,500 based on $4,000 of qualified expenses (primarily tuition costs). There are income limits so not everyone is eligible for the credit which can only be used for four years per child.
An important caveat for the AOTC is the money used to pay for tuition cannot be withdrawn from a 529 college savings plan (such as Edvest in Wisconsin) as there is a restriction on “double dipping” for tax benefits. Therefore, I often recommend people pay the first $4,000 of tuition from another source and use the Edvest account for the remaining tuition plus other expenses (such as room and board).
Once you’re age 50, you can make additional contributions to your employer-provided retirement account or an IRA. The “catch-up” contribution to employer-provided plans (such as 401k or 403b) is $6,000. For a Traditional IRA or Roth IRA, the additional amount is $1,000 per year. There are income limits for making contributions to IRAs but the ability to contribute more over the last 15-20 years of your career can make a substantial difference in how much you accumulate.
After age 70½, anyone with retirement accounts must typically start taking withdrawals (even if they don’t need the money). One way to reduce the taxes on these withdrawals is to distribute the money to charities with a qualified charitable distribution (QCD). Through the use of QCDs, individuals can make tax-free withdrawals from their retirement account.
Since the standard deduction is significantly higher under the new tax laws, this strategy is even more attractive for anyone with charitable intentions because they may no longer be itemizing resulting in no tax benefits from typical charity donations.
While April 15 may seem a long time away, it’s worth reviewing your tax situation now in case there are adjustments to make before the end of the year.
