With a little advanced planning, you may put yourself in a better position for tax season. Consider these easy tips to get started.
Contribute as much as you can to your retirement plan
Your employer may offer a 401(k), 403(b) or other retirement savings plan. Contributions to these plans may be made pre-tax which means they will reduce the amount of your income that is subject to tax for this year.
Many employers allow you to set up automatic withdrawals from your paycheck. This means you don’t have to set aside money each month – it comes out of your paycheck before you see it.
Take advantage of other pre-tax options
You may want to contribute to a healthcare savings account or flexible spending account. Such contributions are made on a pre-tax basis and will also reduce your income.
Will you itemize deductions or take the standard deduction?
Beginning in 2018, the standard deduction amount nearly doubled over previous years. Some itemized deductions were reduced, while others were eliminated completely. Many taxpayers are now taking advantage of the standard deduction. To decide if you should claim the standard deduction or itemize, a good starting point is to add up your itemized deductions. If that number is higher than the standard deduction amount, you would itemize. If it’s lower, then you take advantage of the standard deduction. If you are itemizing your deductions, look for ways to maximize the amount, for example by increasing your charitable contributions.
Consider how you make charitable gifts
If you’re only itemizing to account for your charitable gifts, you may want to consider taking advantage of a Qualified Charitable Distribution (QCD). This is more commonly known as “IRA to charity.” To take advantage of this strategy, you must be 70 ½ and you can direct money from your IRA to your favorite organization. This will reduce the taxable amount of your Required Minimum Distribution (RMD). There are a couple of rules to make this work, so you should talk to your advisor or tax professional to see if this might be a good strategy for you.
Another strategy to consider is “front loading” or bunching your charitable gifts. For example, if you usually give $5,000 per year to your favorite charity, but that amount combined with your other itemized deductions will not be greater than the new standard deduction. If you keep giving $5,000 each year, you won’t receive the income tax benefit from your charitable gift. Instead, you could consider “front loading” or “bunching” your charitable gifts into one year. For example, if you make four years’ worth of gifts at once that might bring you over the standard deduction amount. With this strategy, in year one you might make $20,000 of charitable gifts, but then you wouldn’t make any gifts in years two, three or four.
Consider a donor-advised fund
If you decide to “bunch” your charitable gifts, or even if you just want to streamline your charitable giving.
With a DAF, you will make a charitable gift to the fund which is what you would keep track of for income tax purposes. You can distribute the funds to charity over time (you don't have to distribute all of the funds in the year that you made the gift). And, you do not have to keep track of each distribution to each charity. Note that contributions to a DAF are irrevocable meaning once you make a gift to your DAF you cannot get the funds back for your own personal use. But you do retain certain advisory rights over which organizations you wish to benefit from your DAF. Your TIAA advisor can tell you more about DAFs.
Understand required minimum distributions
If you have turned 70 ½ or will be soon, you’ll likely need to start withdrawing money from your retirement accounts. If so, make sure that you have a plan in place and actually start taking your required minimum distributions (RMDs). If you miss an RMD or forget to take them, you could face severe income tax penalties (up to 50% of the RMD amount). Together with your tax advisor, a TIAA advisor can help you understand the distribution requirements and see how your required minimum distribution strategy fits into your broader retirement planning.