Now or Later?

WANT TO CUT YOUR tax bill for this year and next? The main thing is to act—or not act—before Dec. 31, while there’s still time to take advantage of tax angles that can generate dramatic savings.

Once we’re beyond Dec. 31, it’s generally too late to do anything but file Form 1040 on the basis of what took place the preceding year. There are a few exceptions. For instance, early in the year, you can still make deductible contribu­tions to some tax-deferred retirement accounts, such as traditional IRAs, SEPs (simplified employee pension plans) and other plans that reduce taxes for the prior year.

What should you do before year-end? There’s the obvious: Aim to make maximum contributions to your employer’s 401(k) or 403(b) plan. But you should also think about whether your tax bracket will be higher or lower next year—and hence whether you want to shift taxable income or deductions into next year or generate them this year.

Consider an example. The law allows individuals who buy EE savings bonds to postpone reporting the interest income until they cash in the bonds or the bonds mature. The interest is also exempt from state taxes—a real advantage for those in high-tax states like California, Connecticut, Hawaii, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont.

This option to defer provides savings bond owners with some valuable leeway in reporting their interest. With careful planning, the deferral can become the equivalent of an exemption from taxes.

Let’s say middle-incomers Joe and Josephine Seispack expect to fall from the 22% bracket for 2018 (taxable income between $77,400 and $165,000) to the 12% bracket for 2019 (taxable income between $19,400 and $78,900). Why the descent to a lower bracket in 2019? Joe or Josephine might no longer moonlight at a second job, or perhaps they decide to take early retirement.

The Seispacks tell me that they intend to redeem some EEs and use the accumulated interest for their spring vacation. I remind them that when they redeem hurts or helps. Suppose they pay no attention to the calendar and remove $5,000 of the accumulation before Dec. 31. The IRS takes $1,100—or 22%—and the couple keeps $3,900. What if they bide their time until after Dec. 31? The IRS’s share decreases to $600, or 12%, and their vacation kitty increases to $4,400.

Timing the sale of savings bonds is just the beginning. There’s a host of ways to shift taxable income from one year to the next. Got a winning stock you want to sell or a tax loss you want to realize? Contemplating a large charitable contribution? Are you a freelancer who plans to buy a new laptop that’ll count as a deductible business expense? Do you have customers you need to bill? This is the time of year to act or not act—depending on whether you think your tax bracket will be higher or lower in 2019.

Julian Block wrote and practiced law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). He died in 2023. Check out the articles that Julian wrote for HumbleDollar.

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