As we are coming off the April filing deadline for calendar year tax returns, you may be wondering what you can do at this point to decrease your tax bill. Being proactive is important, as many tax strategies take some time to implement and may need to be in place prior to the end of your reporting tax year (December 31 for calendar year taxpayers).
Here are five effective strategies that may help lower your tax bill.
- Retirement Contributions: As an incentive towards retirement savings, you have a lot of flexibility for contributions to workplace retirement plans (including ESOPs) as well as to individual retirement accounts. As long as certain requirements are met, contributions to such plans may be deductible if paid by the extended due date of your tax return. This rule may give you some flexibility in determining the most advantageous deductible contribution in a given tax year.
- Losses: Are you fully utilizing any business or personal losses? Any pass-through entity losses sustained must meet several tests (basis, at risk, and passive loss limitations) in order to be fully utilized to offset other income items. Planning may be necessary to ensure that these tests are satisfied to fully deduct your business losses.
Capital loss harvesting is also an important activity that must take place before year-end. With the down markets over the last year or so, many clients have seen their investment portfolios decrease in value. Action must be taken to recognize the capital losses to effectively reduce your tax bill. Capital losses are subject to strict limitations, so we recommended that you reach out to your advisors to determine the appropriate amount of losses to recognize.
- Business Compensation: If you own a business through a pass-through entity such an S corporation, you may be able to achieve tax savings by shifting some income from wages to owner distributions. Be cautious, however, as the IRS does require S corporation owners to pay themselves a reasonable salary. If you currently operate as a single-member LLC, there may be some tax savings available if you restructure to an S corporation.
- State Tax Deductions: Since the $10,000 cap on state and local tax deductions was imposed by the Tax Cuts and Jobs Act (TCJA), many taxpayers are no longer able to fully deduct the personal and/or business state and local taxes being paid. However, there are several state tax elections that may allow you to preserve the federal tax benefit by utilizing the deductions in an alternative manner.
- 529 Plan Contributions: If you have young children (or grandchildren), you might be looking for a tax-advantaged vehicle to save for college. The earnings within your 529 plan will receive preferential savings on federal taxes. Depending on your state of residency, your current contributions may be eligible for a state tax deduction to lower your state tax bill.
The tax planning landscape is continually changing with the release of new tax proposals, adjusted tax brackets, and the sunset of current tax laws. Contact your tax advisor or any member of our Tax Strategies team to fully consider your individual circumstances before implementing any of the strategies mentioned above.
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