Plan now for next year, Napolitano says.
Every year about this time, I publish something about trying to cut your income tax bill. This time of year makes sense because in April, many people are looking back at the tax returns or extensions they just filed for 2018 and asking, how can they cut this bill for next year?
You’ve already taken the best first step if you’ve asked yourself or one of your competent advisors that question. Recognizing that you’d like to cut your tax bill and that now is the time to start that process may help you achieve your goal. To start, you need to forecast what your tax return may look like at the end of this year. This means you’ll need to make forecasts and estimates on what you can. Matters like income, expenses, business profit or loss, retirement plan contributions and portfolio management tax issues are the more significant moving parts.
When you have what looks like your best estimate of 2019, examine the results and know you have the next eight months to behave in such a way to reduce your tax bill. Some of the more obvious answers may be to lower income or increase your deductions. Needless to say, that isn’t as easy as it once was.
For those with large savings accounts, for example, you may be able to do something better. While perhaps unconventional, but may work nevertheless, would be to see if you can get a substantially higher yield at another institution. In the end, this will not reduce your income taxes on interest income– it may in fact cost you more in taxes. But it could also be that your new, higher yield after taxes may dwarf your after-tax yield on your money market, CD or savings account. Other matters to consider may be owning some tax free municipal debt in your portfolio or look at the location of your assets.
What “asset location” means is what class of assets are owned in what type of accounts. One way to significantly reduce interest income from your tax return would be to own the assets that generate interest income in retirement accounts. Then any growth assets, which typically don’t generate much in the way of income, can be held in your individual or trust accounts with minimal tax consequences other than dividends or capital gains.
As it relates to your deductions, pay close attention to the new limits for itemized deductions and understand the consequences of further spending under the tax savings category. For certain matters, such as charitable contributions, you may need to bunch your deductions in one year versus tiny gifts each year in order to benefit tax wise. A good way to accomplish that may be through a gift trust account where your entire contribution is deductible in the year of the gift (of course, subject to limits) where the assets are invested in an account until you are ready to dole it out to any specific charity.