Many wage-earning taxpayers with children believe that their tax-planning opportunities are limited because they are not in business or don’t own rental properties. While they don’t have anywhere near as many options, there are still a number of strategies they can employ to cut their tax liabilities. Here are a few of the bigger ones.
1. Maximize your 401(k) contributions. This is one of the best tax-planning tools for wage earners. At a minimum, contribute the amount needed to receive the maximum employer match.
2. Maximize the credit for the first four years of college. The American Opportunity Credit reduces your tax by up to $2,500 of which up to $1,000 is deductible. If your student just started this fall, consider paying spring tuition in December to maximize the deduction. Be aware that this credit phases out when your income reaches certain thresholds. You can still qualify for the Lifetime Learning Credit if your student has already claimed the American Opportunity Credit for four years.
3. In a low-income year, consider converting your regular IRA to a Roth IRA for very little tax cost. Future distributions from Roth IRAs will be non-taxable rather than taxable.
4. Max out your contributions to your IRAs, 401(k)s, or self-employed retirement plans.
5. If you itemize, clean up your garage, closets, and sheds and make a donation to Goodwill or a similar charitable organization. Donations must be in good or better condition. Get a receipt, and I would highly recommend taking pictures to support the deduction.
6. An alternative to donating household goods is to sell them at a yard sale. Since items are usually sold below their original cost, the proceeds will be tax free.
7. If you itemize, prepay medical expenses by December 31. This year you can only deduct the amount that exceeds 10 percent of your adjusted gross income (AGI). You can charge your medical expenses to a credit card and claim the deduction this year, even if you don’t pay the bill until next year.
8. Track your medical and contribution mileage. You can deduct 20 cents per mile driven for medical purposes and 14 cents per mile driven in service of charitable organizations. The key to deducting mileage is maintaining proper records. Keep a log every time you drive.
9. If you are falling short of the itemized deduction levels ($12,000 for singles, $18,000 for head-of-households and $24,000 for married couples) consider bunching your deductions so that you itemize in one year and use the standard deduction the following year.
You can do this by paying one year’s property tax in January and the next year's in December of the same year. Be sure to take into the account the new limitation on state and local taxes (SALT). Starting in 2018, you will only be able to deduct $10,000 per year in SALT so plan accordingly.
Then pay your medical expenses and donations in that same year.
10. If you are thinking about buying a car in early 2020, consider buying it before the end of the year. You can deduct the sales tax on the auto in addition to the sales tax amount calculated from the IRS tables.
11. Get a home equity loan and pay off personal loans where the interest is not deductible. You can deduct the interest on up to $100,000 of the home equity loan, regardless of how you use the borrowed funds.
12. If you have losses from sale of stocks and mutual funds you should consider selling stock investments with a large amount of unrealized gain in order to use these losses. Check with your tax advisor so you can get advice about your particular situation.
13. As long as it makes financial sense and fits with your financial goals, sell any stocks in a loss position to offset any capital gains you may have from the sale of other investments. But if you have losses from 2018 or prior years, consider selling stocks that have built-in gains to use the loss and shelter the gain. If you are replacing the sold stock, you must wait 30 days or consider buying a different company’s stock in the same industry.
14. Invest in tax-free municipal bonds. These bonds are typically free from federal, state, and local taxes. This makes them an excellent tool to reduce taxable income, even for higher-income taxpayers.
15. If you have taxable income from investments that you will not use to live on for a number of years, consider investing in an annuity to defer the taxes on this income until you use it in the future.
16. Pay down your outstanding student loan interest.
17. Review your Alternative Minimum Tax (AMT) liability exposure. The new law reduces the number of people that will be affected by the AMT. But if you are one of the unlucky ones getting hit, you may be able to reduce or eliminate the damage by postponing tax preference items until 2020. Check your 2018 tax return: If you paid an AMT, get with your tax advisor and explore ways you may be able to avoid it in the future.
18. Keep good records to “audit-proof” your deductions. The IRS follows a simple rule—if it isn’t written down, it didn’t happen! Keep good records for every deduction and receipt of non-taxable income.
19. If you and your siblings pay for more than 50 percent of your parents’ support, you should explore claiming them as an exemption. If you are single, this may allow you to claim the lower-rate head-of-household status.
20. Make the most of health savings accounts (HSAs) for paying health care costs that are not covered by insurance. If your employer offers one, contribute the maximum allowed (or as much as you can afford). The limits are $3,500 for individuals and $7,000 for families.
21. Rent out all or a portion of your principal residence or second home for fewer than 15 days, and you don’t have to report the income.
22. Deduct alimony payments. Under the new tax law you can no longer deduct alimony payments made pursuant to a post-2018 divorce agreement. This means that an alimony deduction will be allowed for pre-2019 divorce agreements as long as all of the tax law requirements for deductibility are met.
23. Make sure your home equity loans are deductible. The new tax law completely eliminates the write-off for home equity debt unless you use the proceeds for improvements on your main home and one other personal property. Using funds for anything else will make the interest no longer deductible.
24. Be careful of the 3.8% surtax on certain unearned income. If you have unearned income and your adjusted gross income is approaching $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all others, you need to see your tax planner before year-end in order to limit the effect of this surtax designed to soak the rich.
25. Consider arranging with your employer to defer until early 2020 any bonus you may earn if it will push you into a higher tax bracket.
26. If you are older than 70½ and are required to take a minimum distribution from your IRA, consider making any planned charitable donations directly from your IRA rather than from your personal funds. This prevents the donations from being added to your income when the higher standard deduction eliminates itemized deductions for most retirees.