How Taking Inventory of Your Finances Now Can Pay Off in April

By Britt Erica Tunick

Once December rolls around, everyone is occupied with the holiday season –from school break, to gift giving and everything in between, there is no shortage of things on most people’s to-do lists. As full as your to-do list may be, however, there’s one thing you are likely missing that should be on there: a year-end review of your finances.

As anyone old enough to have stopped believing in Santa knows, the holidays fly by and before you know it another year has gone, meaning another tax season is just around the corner. But taking just a bit of time to review things and make necessary adjustments can pay off significantly down the road.

The new Tax Cuts and Jobs Act, enacted at the end of 2017, simplifies taxes by providing for a larger standard deduction of $12,000 ($24,000 for married couples filing jointly). Thus, it no longer makes sense for many people to itemize deductions. However, some changes may result in higher taxes for those who do itemize, such as the lowering of the maximum deduction for state and local taxes to $10,000. So, it goes without saying that you’ll probably want to take every reasonable step to reduce the taxes you will ultimately owe. One way of doing that is by increasing the contributions you make to a 401(k) plan or, if you don’t have one, to a traditional IRA.

If you can afford it, stepping up 401(k) or IRA contributions to the maximum amount allowed not only positions you for greater savings at the time of your retirement, but also lowers your amount of taxable income. For 401(k) plans, the 2018 contribution limit is $18,500, which can translate to a savings of more than $4,000 for people in the 22% tax bracket. That savings can be even higher for people over the age of 50, who are eligible to make catch-up contributions of an additional $6,000, for a total contribution of $24,500. In the case of traditional IRAs, the 2018 contribution limit is $5,500, or $6,500 for anyone over 50 looking to utilize catch-up contributions. For self-employed individuals with SEP IRAs, the maximum contribution is up to 25% of your income, up to a maximum of $55,000.

If you are lucky to have income high enough that you may be reaching the next tax bracket, you may want to consider making some year-end charitable contributions. Just make sure that your total contributions and deductions exceed the new standard $12,000 deduction ($24,000 for couples filing jointly), and that they are made before Dec. 31 to qualify.

Depending on which state you live in, another thing that can help lower your overall tax bill is increasing the amount you contribute to a child’s 529 college savings account. Although there is no federal tax deduction, contributions to 529 Plans are deductible in some states, and can reduce the amount of your state income tax liability.