With the end of the year approaching, now is the time to be looking for year-end tax-saving opportunities. This is particularly true for 2018 since this year a majority of taxpayers will feel the effects of the new tax legislation for the first time. The following opportunities are some ideas that you should discuss with your tax advisor.

Maximize Pre-Tax Retirement Savings:

Consider increasing your contributions to your 401(k), IRA or other retirement plan to reach the maximum allowable contribution. Pretax contributions not only reduce your taxable income now but will also increase your retirement income later. The deadline for 401(k) contributions is December 31, 2018 while IRA contributions can be made up until April 15, 2019 for the 2018 tax year.  If you haven’t contributed enough to your 401(k) to secure the entire company match, you are giving away free money if you don’t do so before year-end.

Consider a Roth Conversion:

For those individuals with traditional IRAs, consider converting enough funds from your traditional IRA to a Roth IRA to reach the top end of your income tax bracket. You will be required to pay tax on the conversion amount; however, unlike a Traditional IRA, qualified distributions from a Roth IRA aren’t subject to federal taxes as long as the Roth IRA has been open at least five years and you have reached age 59 1/2. When determining whether to convert to a Roth IRA, you need to consider your current tax rate versus what it may be when you are taking withdrawals and also whether you have sufficient funds outside the IRA to pay the tax on the conversion. The penalty (10% if you are under 59 1/2) plus the loss of those funds and the tax-free growth on them in the Roth IRA make the conversion disadvantageous in virtually all situations when you cannot pay the tax with outside funds.

Harvest Tax Losses:

Year end is a good time to consider selling off underperforming investments held in taxable accounts to generate capital losses before year end. These capital losses can help offset any realized capital gains you may have from better performing investments. Additionally, most taxpayers are able to deduct up to $3,000 of capital losses in excess of any capital gains from their ordinary income.

Section 529 Plans:

Section 529 plans provide another valuable tax-advantaged savings opportunity. While contributions are not deductible for federal tax purposes, any growth is tax-deferred, and distributions used to pay the beneficiary’s qualified higher education expenses come out tax-free. Currently, contributions to Georgia’s 529 plan are deductible for Georgia income tax purposes up to $4,000 per beneficiary for married filing jointly taxpayers and up to $2,000 for all others. South Carolina taxpayers can deduct any amount they contribute to a South Carolina 529 plan so long as they have South Carolina income. Under the new tax legislation, qualified expenses were expanded to include elementary and secondary school tuition; however, tax-free distributions for such expenses are capped at $10,000 annually per student.

Health Savings Accounts:

A Health Savings Account, or HSA, is a great planning tool for those individuals covered by a qualified high deductible health plan. HSA contributions are tax deductible, any earnings grow tax-free, withdrawals for qualified medical expenses are also tax-free, and you can carry over a balance from year to year.  After you turn 65, there is no penalty for withdrawals not used for medical care, just income tax, making an HSA another vehicle for retirement savings. For 2018, you can make a deductible contribution of up to $3,450 for those with self-only coverage and $6,900 for those with family coverage.  Those aged 55 or older can make an additional $1,000 catch-up contribution.

Charitable Giving:

Giving to charity not only provides satisfaction, it can also generate tax savings. Outright cash contributions made to qualifying organizations are the most common, and under the Tax Cuts and Jobs Act (TCJA), deductions of cash gifts to public charities increased to a maximum of 60% of your adjusted gross income, up from 50% in 2017. Appreciated publicly traded securities held longer than one year are also prime assets to consider donating. This is because you can deduct the current fair market value and avoid the associated capital gains tax you would have incurred had you sold the security and donated the cash proceeds to the charitable organization. It should be noted that securities with unrealized losses should not be donated. It is more advantageous to sell any stock worth less than your cost basis in order to generate the capital loss and then donate the cash proceeds from the sale to the charitable organization.

If you are over 70 1/2 and taking required minimum distributions (RMD), you should seriously consider making your charitable donations directly from your IRA.  Rather than a charitable deduction on schedule A, the donation reduces the RMD and thus your adjusted gross income. You therefore receive a deduction for the full amount of the donation, regardless of whether you itemize or take the standard deduction.