Over the last few months, we’ve busily been working to help our clients make the most out of the new tax law. Today, I’m offering you my top 18 tax tips for 2018 based on my months and months of study. Perhaps some of these could help save you thousands, possibly even hundreds of thousands of dollars if you do them before the year-end. But don’t wait!
Please understand. I’m a CERTIFIED FINANCIAL PLANNER™ who specializes in working with business owners showing you how to build wealth. Tax Planning and Tax Advice are two different things. I work with CPA’s and Tax attorney’s to develop tax reducing plans. I’m not a CPA or tax attorney. So please do not construe any of these 18 tips as advice. Take these ideas to your CPA or tax attorney and discuss how they fit your specific situation. Some of these ideas may not work in your particular situation. These professionals are the ones who know your life and can tell you whether or not these will work for you.
With that being said, let’s jump in and discuss.
Perhaps you’ve had a banner year and are trying to reduce or prevent from incurring any more taxes. If that’s you then maybe you stop billings and collections. If you’re in a cash-based business then you may delay collecting some income from a job that you’re currently working on. If you’re on an accrual basis, then you may stop billing. However, if you don’t know where your books are at then that will be a hard one to judge. That’s why it’s essential to keep pristine books in your business. So, the first thing you can do, is you stop billing and collections today in order to push that income into next year.
We often utilize this with clients at year end. An example – I have a client who likes to replace tires on machinery every January. And so this year we suggested purchasing the tires now, and then he will install them in the first two weeks in January. Meaning it’s an expense he is going to incur in the early phases of next year, 2019. So, this year, he going to pay for the tires now to incur the expense in this calendar year… 2018. The expense in 2019 will help reduce some taxes. Remember with expenses, the more we have, the more it affects our net income.
If you are eligible for a health savings account eligible insurance, enroll now. You have until December 15th to do so. Now, by enrolling in an HSA eligible insurance plan, you’re not going to receive direct tax benefits for this calendar year of 2018. But what it is going to do is make you eligible for benefits next year, which will help reduce taxes in 2019. Now, that’s the planning side of me; looking at how can we reduce the future. So if you can, enroll in an HSA eligible insurance plan.
Another thing you can do as relates to health is that you may consider an HRA, a Health Reimbursement Account. Now, you need to be a business owner to do this. But let’s say that you have a special needs child; and you’re covering costs for training, for transferring, for babysitting, for all the things that go without the necessary care of a special needs child. You may be carrying expenses in the tens of thousands of dollars. In that case, a Health Reimbursement Account is (HRA), could potentially be a good solution for you. The challenge for 2018 is you have to reimburse your expenses in December for this year. Many business owners may not have the funds to create this reimbursement this late in the game. This could be a problem for 2018, so this too could be a forward-thinking tip.
If you are a W-2 employee of your company or another company, max out our 401(k). So this applies to the S -Corp—the people who are taxed who as LLC or an S-Corp. If this is you then you want to go ahead and place the maximum amount in your 401(k) before December 31st. For those under the age of 50, you can do $18,500 for this calendar year 2018. For those of you over the age of 50, you can contribute $24,500.
Another thing you can do, again futuristically planning, is you can put your spouse on the payroll. My beautiful wife is on our payroll. She does some work for us here in the company and we pay her for her services. Then most of her paycheck goes directly to her 401(k). We had to make some adjustments in our 401(k) plan for this to work, but now because she’s on payroll she can place her earnings into the 401(k). If Emily earns $20,000-$21,000 she can place $18,500 for this year (2018). And if I make the same 401k contribution amount, then our family is funding our retirement with $37,000 per year. This $37,000 is deductible against Federal Income Taxes. Additionally, depending on your 401k plan design, you may even save some money on the dreaded self employment tax via company matches and profit sharing. So if you have your spouse on the payroll it not only cuts your net income, it funds your retirement.
Another thing you can do is you can pay your kids. Now, they need to have a legitimate job in your business. Maybe they come in and clean the office. Maybe they shred papers. Maybe they take photos for you. Maybe their models on your website. Maybe they wash your work trucks. They may even clean job sites. Maybe they even work alongside some of your trusted employees. Regardless of what they do, you can hire your kids as employees.
However, if you pay your kids here’s what is crazy. The new standard deduction is $12,000, so you can pay your kids up to $12,000 a year and they pay no tax. And depending on the structure of your business, (we’re taxed as a partnership in our company) then you may not have to pay FICA and FUTA tax withholdings. So there could be zero withholdings on the kids. That is $12,000 potentially that each child could earn tax free. For my three children, that’s $36,000 in tax-free income to the kids. And even more impressive, I can deduct their income as an expense on the company.
Then if you’re a mean dad like me, you can charge them rent, transportation costs, or maybe even education expenses. You can let them buy their own clothes, pay for their own summer camp and even buy their own school books. Those are things which you typically are paying for with after-tax dollars already. You can pay your children money out of the business for a true, legitimate job.
We all know at the year-end, there are typically charities in need of funds. So you may write a large check. You may provide a highly appreciated stock or you do some sort of charitable contribution., but it must be done before December 31st.
Now adjusting your W-2 is a tax planning tool for going forward into next year that you want considering doing this year. Here’s an example of the difference this could make. Let’s say that my company could pay my family (Emily and I combined)$100,000. Most business owners will pay each spouse $50,000 each to arrive at the $100,000 gross family income. The problem with that is it that’s not a very good use of the way the Social Security works. You would be better paying off $90,0000 to Spouse #1 and paying $10,000 to Spouse #2, at which point you would then divert the $10,000 Spouse #2 earns to the 401(k).
Whenever we retire, the way the Social Security works is this the lesser paid spouse has the ability if possible to collect up to 50% of the gross social security income paid to greater earning spouse. Making this change not only benefits you in your 401(k), but it maximizes your long-term Social Security benefits. This is a tax saving method.
I’ve seen families where they have they have both husband and wife making $120,000 from their business. However, it just isn’t a good utilization of social security. They’re both paying the full amount of self-employment or the full amount of the FICA/FUTA Tax. Instead, if you move one spouse to the $130,000 range, any amount of money over that you are taxed only at the Medicare rate, which is 2.9%. So by adjusting your W-2 now, you can pick up social security benefits and potentially a ton of savings on self-employment tax or FICA/FUTA tax.
The next thing you can do—which is super cool this year because of the Tax Cuts and Jobs Act— is buying a car. Before you do this talk to your advisor, but if you buy an eligible vehicle you can get a major write off this year—more so than in the past! Now, that not an open checkbook for all of us crazy country folk that say, “I want to buy me a new truck!” I am NOT telling you to go out and buy a new truck. I’m saying talk to your advisor if you need—the optimal word is, need—a new vehicle. Now maybe the time to make that purchase.
This is a crazy one, but you can actually rent your house out to others or to your business. Now, you may not have used this strategy in 2018, but it is one you might want to use in 2019. Let’s put it in this perspective. In East TN we have the Bristol race. I have clients who will actually rent their house out to people for the race, while their family goes on vacation. By doing this, they receive the money to go on vacation and because they rent it out for less than 14 days the money is tax-free!
You can do the same thing for your business if you are eligible based on your structures. Essentially you can rent your home to the business for business functions. Let’s say you hosted a client event for your business at your home. And let’s assume that a comparable venue would charge $5,000 for this same event. You could charge your business $5,000. The business would have a deductible expense and you could potentially receive tax-free income. This is a ploy that many people use. In fact, I was listening to a couple of tax attorneys on a podcast and this was one of their big things. Also at the Financial Planning Association Conference this year, I heard a tax attorney and CPA explain this concept. So many self-employed people miss this. Renting your house can save you a chunk of money.
With the increase in itemized deductions this year, you can bunch your expenses for Schedule A. If you’re single the standard deduction is $12000. If you are married and filing jointly, you are looking at $24,000. Here’s an example of how you might use this tip. If for some reason, you had a year where you had a ton of Schedule A expenses and you are really close to that $24,000. You may want to try to add some expenses from next year to this year. Maybe you call your church and say, “Hey, look, Pastor, I know I gave $20,000 this year. I’m to go ahead pay the other $20,000 for next year now. So you will get my tithe check for 2018 and 2019 NOW vs waiting until year instead of next. ” By doing so you actually increase your deductions, allowing you to itemize and save more money. Then in 2019, you would try to minimize your Schedule A expenses and just use the Standard Deduction. If you do this strategy for several years in a row, the tax savings really add up!
Another option is using the home office standard deduction, which is $1500. However, there are some rules on using this, so you will want to check the IRS regulations, or talk with your CPA or tax attorney. However, so many business owners work at home. And so many people don’t realize that there is a home office standard deduction. You may be thinking, “Justin, that’s only $1500.” Well, if you’re in a 40% tax bracket like some of the clients I work with, that’s $700-$800 you just saved. So check to see if you are eligible for this deduction.
Using this tactic will likely involve your investment advisor. Tax loss harvesting is where you sell a security that experienced a loss in order to offset gains from another. Think of harvesting—you are picking corn out the field. It’s the same concept. You’re going to look at your portfolio to check which positions are down right now, go and sell that position to capture that loss. That loss will then be utilized on your tax return. Now there’s a long-term and a short-term losses. And both types could add tax savings for you in 2018.
Make sure your books are up-to-date. Your books need to be pristine. I not just talking about the income and expenses for your business. You also need to update your books and records for your home and your family. Those who are the most prepared when you meet with your tax advisor or your CPA in about three months are placing that professional in a position to maximize their tax savings.
If you use a software, like a Quickbooks for your business as I do, or maybe you use a Quicken or something similar to that for your home, then you want to go ahead between now and Christmas and shore your records up. Go in and make sure that you have all your different expenses allocated properly so when you meet with your tax advisor they have all your accurate and complete. You are helping your tax advisor think about all the different tax savings scenarios that you could be potentially eligible for.
You are actually past the deadline to do this for this year, however, you can actually consider a defined benefit contribution for next year. I like to use a 401(K) plan in conjunction with a cash balance plan. We can actually put those two together. We helped several of our clients this year with this strategy. This combo allow the business to make large deductible contributions to the employees of the company. In doing so, the business owners receive so many benefits. First, we can design the plan where the business owner receives the lions share of the contribution which helps the business owners accelerate their retirement savings. This strategy also helped several of our professional clients reduce their income to the point where they could qualify for the new QBI 20% deduction. You have heard me harp on the fact that you need a CPA and a CFP. This is one area where the CFP and CPA working together is awesome! Making sure talking to your advisers and making sure you understand what a cash balance and a 401k combination is.
This is not for everybody, but you could consider a conservation easement. This is essentially a charitable deduction where the charitable contribution is a piece of land, which provides you a tax benefit on your 1040 Return on Schedule A. It actually works really well whenever you start bunching expenses on Schedule A. Again, speak with your tax advisor.
The most complicated is the last one and it is the Opportunity Zone Investment or the O-zone. This tip is for those individuals who may have sold a business in 2018 or for individuals who have a ton of capital gains. Maybe you sold a piece of real estate or a piece of equipment. Whatever it may be, if you invest in these opportunities zones which help spur economic development, the new tax law allows you the maximum tax savings on that income.
I’ve given you a pretty exhaustive list! You now have 18 ways to reduce your taxes! Talk to your CPA. Talk to your advisor. Please do not just take my advice. Again, I’m not telling you to go and do all or even some of these 18 tips. I’m suggesting you at least approach and consider, along with your tax advisor, whether these ideas could alleviate a portion of your tax burden. However, NOW is the time to do this to help make your taxes Financially Simple™!