As the year comes to a close, and you’re busy rushing around to get those final presents for the ones you love, here are a few quick, last-minute strategies for cutting your tax bill on April 15.

1. "Take a small example, take a tip from me. Take all your money, give it all to charity."

Unlike the Sublime song, What I Got, I’m not advocating giving all your money to charity at year-end. But, if you itemize your deductions, charitable contributions are one of the areas you can boost at year-end that may have an big impact come tax time. A caveat of this planning tool is that the Trump Tax Cuts of 2017 (in effect for the 2018 Tax Year) made big changes to the Standard Deduction and will reduce the number of Americans who will qualify to Itemize their Deductions. However, you may want to look into “Bunching” to take full advantage of the tax law changes.

What changes brought about by the Trump Tax Cuts of 2017 will impact most people?

The Trump Tax Cuts of 2017 not only increased the Standard Deduction, but also made some significant changes to Schedule A (Itemized Deductions).

They eliminated Miscellaneous 2% Deductions (think unreimbursed employee business expenses, investment management or tax preparation fees, and union dues), put a $10,000 cap on state, local, real estate and property tax deductions, limited the mortgage balance allowed to take the mortgage interest deduction and limited the deductibility of home equity loans or lines of credit unless that money was used to improve your home.

What is "Bunching"?

"Bunching" is a term to describe either pulling ahead deductions to the current year or pushing out your deductions into later years.

With the changes to Schedule A, most Americans will not qualify to Itemize given the new, higher Standard Deduction. That doesn’t mean that they can't make some adjustments to qualify every once in a while.

That’s where "Bunching" comes in.

Maybe you’re a charitably-inclined Married Filing Jointly couple. You usually give $10,000 or so each year to charities. You’ve got mortgage interest of $5,000, and state, local and property taxes totaling $8,000 each year. Those 3 pieces of Schedule A only total $23,000, so you’ll take the $24,000 Standard Deduction.

What if I told you that instead of donating $10,000 in 2018, you pull $5,000 of what you’d normally donate in 2019 into 2018? Well, your Itemized Deductions now amount to $28,000 and you’re able to itemize. In 2019, you’ll just donate the remaining $5,000 to charities and claim the $24,000 Standard Deduction. In 2020, you’ll donate a bit more again to boost your Itemized Deduction amount and so on.

Donor Advised Funds

I know what you’re saying. I really don’t want the charities to receive a big donation from me in 2018 and then get less from me in 2019. Well, there’s an account that you can utilize to take a charitable deduction and still retain control over where that money ultimately goes along with discretion over the timing of those distributions.

It’s called a Donor Advised Fund. A Donor Advised Fund allows you to donate appreciated securities (or cash), take a full deduction on your gift, and then have the ability to make “gift recommendations” to your favorite charities over time. Many also allow you to invest the account and possibly grow it for higher future gift recommendations. Since the tax deduction is taken when the securities or cash are gifted to the Donor Advised Fund, you won’t get an additional charitable deduction when a gift recommendation is fulfilled to your favorite charities. Some examples of DAFs are Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. There’s typically a minimum initial gift (most are $5,000 or more) required to establish the account and then you can make subsequent gifts of any amount.

2. Sell your losers

The markets have been choppy this fall and some investments that you hold in taxable accounts may have unrealized losses. If you have a taxable investment account, look through your account. It may be tax advantageous to sell some of your positions that are in a loss and capture the tax benefit. This is referred to as Tax Loss Harvesting and is a great strategy to utilize, just make sure you are very aware of the Wash-Sale Rules.

Capital losses are able to offset any capital gains (or capital gains distributions) you incur as well as offset up to $3,000 of ordinary income. Any losses over and above your capital gains and the $3,000 of ordinary income can be carried forward for use in future years. 

3. Open and contribute to an IRA

Luckily, you can open and contribute to an IRA up until the tax filing deadline (without extensions). For the 2019 tax year, the deadline is April 15, 2020.

As you may, or may not know, the “I” in IRA stands for “Individual”, meaning, each spouse can open and maintain a separate account. There are no “joint” IRAs.

If you’re a married couple making less than $103,000 ($64,000 if single) in 2019, each spouse could make a fully deductible contribution to a Traditional IRA of $6,000 (plus $1,000 “catch-up” if over age 50). Not only are you saving money toward your eventual retirement, but you’re also receiving a tax deduction for the amount of your contribution for the current year. Growth on your money within a Traditional IRA is tax-deferred. When you pull money out, all will be taxed as ordinary income.

Another option would be to open and fund a Roth IRA. If you’re a married couple making less than $189,000 ($120,000 if single) in 2019, each spouse can make a full contribution of $6,000 (plus $1,000 “catch-up” if over age 50) to a Roth IRA.

A Roth IRA differs from a Traditional IRA in that you do not get an upfront tax deduction for the amount in which you contribute. However, any growth on the account in the future is tax-free. This type of account is especially great for those who believe their tax rate now is lower than what they expect it to be in retirement. If nothing changes between now and 2025 when the individual aspects of the Trump Tax Cuts expire, tax rates will be higher going forward.

4. Check your Flexible Spending Accounts  

This tip isn’t going to help you reduce your taxes for this year, but it may help you from losing out on some of your savings from this year.

Healthcare Flexible Spending Accounts (HFSAs) are designed to be a way to stash money away for healthcare expenses during the year. The downside is the requirement of these accounts to be fully dispersed by the end of the year or you forfeit that money. The infamous “use it or lose it” provision.

Check your balance in your HFSA and if you still have money remaining, stock up on qualifying items prior to year end. Here’s a pretty good list from ADP of what does and does not qualify for HFSA reimbursement. Some employers allow a portion of the HFSA account to roll into the next year. Check with your employer for more details.

Focusing on a few of these tips prior to year-end may just put you in a better position come tax time.

About Chessie Advisors

Erik O. Klumpp, CFP® EA, believes that teachers, engineers, and young professionals should have access to objective, fee only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call.

This is the time of year when the temperatures turn brisk, leaves begin changing colors and fall, the smell of apple pie fills your kitchen, college football draws you in every Saturday, and you get notice from your employer that Open Enrollment must be completed in the next few weeks.

Like tax season, this typically is a stressful time for employees trying to understand what they have currently, what benefits are changing, and what they may need in the year ahead. We put together a list of benefits to keep in mind while you're flipping through your benefits book or website over the coming weeks to help you conquer Open Enrollment.

1.  Take Advantage of Flexible Spending Accounts

The Big Brother to the ever-popular Health Savings Account (HSA), still packs a lot of punch for those who qualify. This benefit comes in two flavors: Healthcare Flexible Spending Accounts and Dependent Care Flexible Spending Accounts. They both work in similar ways, you contribute to these accounts pre-tax out of your paycheck and the money gets set aside in an account that you can use (or be reimbursed) when you incur healthcare or dependent care expenses.

Healthcare Flexible Spending Accounts

Healthcare Flexible Spending Accounts (HFSA) are only available to those employees not covered under a High Deductible Healthcare plan coupled with an HSA (Health Savings Account). The annual contribution limit to this type of plan is $2,650 for 2018 (contribution limit has not yet been released for 2019). The real benefit of an HFSA is that your entire yearly contribution into the HFSA is available January 1.

Let’s say you are paid twice a month and have elected to contribute $50 per pay into the HFSA. Let’s also assume that on January 20th, you have a medical procedure where you incur $1,200 worth of costs out-of-pocket. With an HSA, you would have to wait until there is enough money in the account to be reimbursed (the end of the year, unless you had money carryover from the previous year). This is not the case with the HFSA, you could be reimbursed for the full $1,200 incurred on January 20th even though you would have only contributed a mere $50 into the account at that point.

What’s the catch? The catch is that any money not spent in the HFSA is forfeited by March 15 of the following year. The IRS does allow employers to adopt a provision allowing for a carryover of $500 to the following year, but I have not come across this provision being used.

Starting in 2020 (delayed from its original start date of 2018), the Affordable Care Act (ACA) begins imposing a 40% excise tax on healthcare premiums exceeding certain thresholds, with HFSA contributions being included in the premium calculation. If the excise tax remains in place, it’s likely that we will see less and less companies offering these plans over the coming years. Use them while you can!

Dependent Care Flexible Spending Accounts

Dependent Care Flexible Spending Accounts (DCFSA) are similar to their HFSA cousins. Money is contributed pre-tax to an account where the employee can be reimbursed for dependent care expenses they incur over the course of a year.

The DCFSA differs from the HFSA in that your entire balance you’re set to contribute over the course of the year is NOT available on January 1. You’re only able to be reimbursed for the amount you have already contributed to the DCFSA.

Also, you aren’t able to use the DCFSA for babysitters or family members who you pay to watch your children but who don’t claim that income on their income tax return. In order to get reimbursement, you must provide the provider’s name and Employer Tax Identification Number or Social Security number.

The DCFSA is ideal for high income-earning couples as the deduction and tax savings of using this type of account will likely exceed the benefits you would receive from the Child and Dependent Care Expense Deduction allowed on your federal income tax return. The annual contribution limit to this type of plan is $5,000 for 2018 (contribution limit has not yet been released for 2019).

2.  Choose the Best Health Insurance for Your Situation

The granddaddy of Open Enrollment is Health Insurance. The landscape has changed tremendously over the past few years. Company-provided health insurance continues to be one of the most important, and most costly employee benefit. It behooves you to spend time seriously weighing your options. Many companies have been phasing out traditional health insurance plans, like PPOs or HMOs, in favor of less costly, high deductible health insurance plans (HDHP).

HDHPs can be combined with a Health Savings Account (HSA) to allow you, what we like to call, a “Roth IRA on steroids” where you can contribute pre-tax money from your paycheck into the account and use it to pay for qualifying health care expenses without paying taxes. You get the best of both worlds! In addition, unlike Flexible Spending Accounts, HSAs can roll over from year to year, so it’s like an IRA for health care expenses.

So, do you elect a HDHP or stick with the traditional health insurance plan like a PPO or HMO? Terms like coinsurance, copays and deductibles all play into this decision. How often do you visit the doctor? Do you go just for routine check-ups or do you have some ongoing health issues? What do each of these plans cover? What is the maximum amount that I may have to pay out-of-pocket? Do these plans cover specialty services like physical therapy or chiropractic care?

After you’ve determined what these plans cover, and have looked at possible upcoming medical procedures over the course of the next year (like the birth of a child), it’s time to sit down and look at both the premiums you would pay as well as out-of-pocket costs. If your employer contributes to an HSA on your behalf, then that should be factored in as well as a benefit to the HDHP.

If your employer still offers the traditional health care plans, it may make sense to pay a bit more every pay for the additional coverage and lower deductibles. Or maybe you would rather just pay a bit more knowing that there’s greater coverage with the traditional plan should you have a medical emergency. These plans will continue to be phased out as a looming excise tax of 40% on premiums over a predetermined threshold for the Affordable Care Act begins in 2022.

3.  Consider a Pre-paid Legal Benefit (Even for Just a Year)

Many larger employers offer pre-paid legal services as an option for employees during Open Enrollment. These plans typically charge $15-$40/mo for access to legal services and may provide a nice benefit if you’re looking to have wills drafted or other simple legal matters. In some cases revocable trusts are covered, which can easily run $800-$2,000 on their own.

With these plans, the devil is in the details and knowing what you’re buying before you enroll can save you a lot of headaches or higher costs later. Find out what your plan DOES NOT cover BEFORE enrolling. This may end up being a benefit that you enroll in specifically for a service you know you’ll need in the coming year.

4.  Add Life Insurance Coverage (Without a Medical Exam)

It’s common for employers to offer a base amount of life insurance for employees, usually 1-2X the employee’s salary. In many cases, employees can also elect to purchase additional life insurance without having to undergo a medical screening.

This is a great way for those with health issues preventing them from adding coverage outside of their employer, such as those diagnosed with cancer or some other life-threatening illness.

If you’re younger the costs to elect this additional coverage may be slightly higher than what you can get on the outside, but it’s convenient.

With the increasing trend of no longer having a single employer during one’s entire career, it makes sense to not only take advantage of life insurance through your employer, but also add some coverage on the outside, like a term policy.

5.  Bonus Tip: Retirement Savings Check-up

Since you’ve gathered all of your information and are in your planning “mindset”, you might as well pull out your 401(k), 403(b), or 457(b) statements and revisit what you’re doing from a retirement standpoint.

It’s not an employee benefit you elect during open enrollment, but it’s typically the benefit that employees tend to neglect the most. They make their contribution election, choose the funds (or have them automatically chosen for them), but never really circle-back to evaluate how they are doing. Also, make sure that you’re at least taking advantage of your employer match. Open enrollment is a great time for an annual review of these important accounts.

In addition to the tips above, there are a number of other benefits available to you through Open Enrollment that you can, and in some cases, should take advantage of. You may find that they can help you build and secure your family's financial future. If you’re unclear how these benefits fit into your financial life, consider contacting a fee-only financial advisor to help you sort through your options.

About Chessie Advisors

Erik O. Klumpp, CFP®, EA, founder of Chessie Advisors, LLC and Chessie Tax, LLC, believes that teachers, engineers, and young professionals should have access to objective, fee-only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call.