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Year-end tax planning -- more important than ever before

MINNEAPOLIS (Oct. 26, 2018) -- The weather is turning colder in Minnesota, which means 2018 is coming to an end. But, before you break out the eggnog and look up the lyrics to Auld Lang Syne, it's strongly recommended that you take time these next couple months to prepare for the upcoming tax season. 

The 2019 tax season is bound to have surprises. Deductions disappeared among other massive changes with the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017. Then, Minnesota couldn't reach an agreement on tax conformity, meaning our state is still operating under pre-tax reform tax code. This means new forms and many headaches are ahead for Minnesotans when they begin filing their tax forms.

But, there are steps taxpayers can -- and should -- take now to help avoid an April surprise.  

Strategies for planning ahead 

While every taxpayer's situation is different, there are some strategies that everyone should consider between now and Dec. 31. The Minnesota Society of Certified Public Accountants offers these tax-planning tips. 

Do a paycheck checkup

The IRS is strongly encouraging taxpayers to check their withholdings using the IRS Withholding Calculator. In particular, the following groups should perform a paycheck checkup because of how the TCJA may have significantly changed their tax situation:

  • Taxpayers who traditionally itemized their deductions. 
  • Taxpayers with several dependents. 
  • Taxpayers with significant investment income. 
  • Taxpayers involved in the gig economy. 
  • Taxpayers in dual-income families.

Visit www.irs.gov/payments/tax-withholding to complete your paycheck checkup.

Organize your tax records

Now is the perfect time to break out your financial documents and receipts, and to start categorizing them for easier preparation come filing time.

The Minnesota Department of Revenue announced that taxpayers may itemize on their state returns regardless if they itemize or take the increased standard deduction on federal returns. That means what may not be deductible on your federal taxes is still possibly deductible on your state taxes. So, break out those record-keeping books and get organized now to avoid potential misses.

Consider increasing your retirement, health savings investments

Pre-tax savings accounts, such as 401(k) accounts, reduce your taxable income. If you're not maxing out on your contributions, consider doing so to the extent that it's feasible. Pre-tax accounts may include the following:

  • 401(k) or 403(b) retirement accounts. The limit for 2018 is $18,500, with an additional "catch-up" of $6,000 for those 50 and older.
  • Health savings accounts (HSAs). The limit for 2018 is $3,450 for self-only plans, and $6,900 for family. Remember, HSA investment limits include employer and employee contributions. 

Also, keep an eye on pre-tax savings account options during open enrollment. Some employers will offer options such as child care and transportation accounts. If these are made available to you, consider exploring them as possible options to continue reducing your taxable income into 2019.  

Consider making gifts and charitable donations

This is a viable option if you plan to itemize on your 2018 return. Taxpayers can deduct up to 60 percent of adjusted gross income (AGI) in cash charitable donations, compared to 50 percent of AGI in the past. Even if you aren't planning to itemize on your federal return, you may still receive a benefit on your Minnesota return for charitable contributions.

Further, if individuals age 70 ½ and older haven't completed their yearly required minimum distributions, they can use the qualified charitable distribution rules to have donations made directly from an IRA account to a charity.

Finally, while gifts aren't tax deductible like charitable donations are, you can choose to use gifts to transfer assets to others and reduce your potential federal and Minnesota estate tax. You may give up to $15,000 in 2018 without being subject to tax or using up your lifetime exemption. 

Minnesota-specific year-end strategies

One item that was included in the Tax Cuts and Jobs Act was the $10,000 State & Local Tax (SALT) limit. For some Minnesotans who plan to itemize and may not have enough Minnesota income tax to reach the new SALT limit, there may be other state and local taxes that fall within that category to help you reach that limit and for your 2018 return. Talk with a certified tax professional to assess your options. 

Minnesota taxpayers may also want to consider contributing to a 529 College Savings Plan to take advantage of the state's tax credit or subtraction. With the tax credit, you can receive a maximum of $500 or 50 percent of contributions made during the year (income limits apply). Those opting for the subtraction can qualify for up to $3,000 if married filing jointly, or up to $1,500 if filing single, head of household, or married filing separate. 

Need some help?

Year-end planning is an essential step before the official tax season begins. While there are some things you can do on your own, it's advisable to consult with a tax professional before making any decisions that could impact your tax situation. Certified public accountants can help guide you through your year-end planning options and recommend strategies that are the best fit for you. 

Don't have a CPA? Visit www.CPAmeASAP.com or call 800-331-4288 to find a CPA today. 

The Minnesota Society of Certified Public Accountants (MNCPA) serves the public interest by advancing the highest standards of ethics and practice within the CPA profession. The MNCPA delivers on that promise by offering extensive continuing professional education and resources; advocating for members and the public with regulatory agencies and boards; and mentoring and encouraging the CPAs and business leaders of tomorrow. Founded in 1904, the MNCPA has more than 8,500 members who work in public accounting, business, industry, government and education. 

Thank you to Laura Nickolay with White Oaks Wealth Advisors, Inc. for her contributions to this article.  

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