December is here, but there’s still time to strategically minimize your tax liability. Consult with your Mercer Advisors team to help you make the right tax moves. Here are 10 tips that can help you save money:
TIPS FOR BUSINESS
1. Maximize benefits for your employees (or yourself if you’re self-employed).
If you offer retirement plans or health savings accounts to your employees, have them review and maximize their contributions, if possible. If you don’t have plans, it may not be too late to get them established. Paying out bonuses and commissions or adjusting employee withholdings may also be advisable to lower your taxable income.
2. Defer business payments in ways that can benefit you.
On an accrual basis, you should make sure your accounts receivables and customer deposits are up-to-date. On a cash basis, you can defer your invoicing or customer payment requests until after the end of the year. Besides reporting losses, you should use any credit carryovers that will expire by year’s end. Finally, if you run any businesses with your spouse, consider treating those ventures as disregarded entities.
3. Accelerate business expenses, including purchases.
Prepay for expenses where you can, and purchase assets that have advantageous depreciation rules by the end of December. Consider increasing your basis in partnerships or S-Corporations to deduct available losses, including business vehicle leases.
4. Optimize the new 20% deduction for qualified business income.
The 2018 Tax Cuts and Jobs Act means deductions for you as a business owner. Consider your net profit in relation to your payroll to maximize credit. You should also think about separating out parts of your business in order to maximize your deductions.
TIPS FOR INDIVIDUALS
5. Optimize gains and losses.
While your advisor will optimize gains and losses within your investment portfolio, there are other ways to optimize your total tax liability. For example, pull together a list of all your sources of income for the year, and review the different sources: wage income, pension income, social security, any side jobs, sale of property, stock grants that vest, and even gains that were realized in accounts outside of Mercer Advisors, etc. In addition, ask your advisor about using methods like installment sales or like-kind exchanges when disposing assets. You can also take measures that can help you manage the Net Investment Tax. Finally, be aware of tips like the 14-day rental limit on your vacation home.
6. Take advantage of adjustments and credits.
Review your corporate benefits and maximize your Cafeteria plan options. These plans allow for you to pay for childcare, health expenses, and parking/transit expenses on a tax favored basis. They are often called HSA (health savings account, FSA (flexible spending arrangement), DCP (Dependent Care Program), and Parking and Transit. Routing your expenses through these accounts can create significant tax savings! Popular current tax credits include purchasing qualifying electric vehicles or solar equipment.
TIPS FOR CHARITABLE GIVING
7. Use your IRA RMD for charitable giving.
If you’re over 70½ and subject to required minimum distributions, consider making your charitable contributions directly from your IRA to your favorite charity. The qualified charitable distribution satisfies your RMD, and the distribution is not reported as income to you. For those who are no longer itemizing deductions, this charitable gift can still reduce your taxable income.
8. Manage your standard deductions to minimize taxes.
If your annual itemized deductions are close to the standard deduction amount, consider trying to “bunch” your actual deductions into one tax year to maximize your tax deductions, such as charitable contributions. Strategically, you can plan to use actual deductions and the standard deduction in alternating years and consider utilizing donor-advised funds to accomplish this goal. As a reminder, state taxes along with property taxes are now maxed at $10k per year so it may not make sense to accelerate paying your property taxes in the current year, if your municipality allows you to do so.
9. Leverage excess cash flow into tax gifting opportunities.
Take advantage of the annual gift tax exclusion, which allows you and your spouse to make tax-exempt gifts of up to $15,000 to another person every year without requiring additional IRS paperwork. Consider gifting highly appreciated assets to recipients who may be subject to lower tax liabilities.
10. Make sure to factor in life events.
Inheritance, marriage, divorce and higher education enrollment, along with retirement, can affect your tax situation in different ways. Your status on December 31st of the year determines your filing status. Make sure your advisor and tax advisor are aware of these changes with as much advanced notice as possible, as they can materially impact your overall tax rate.