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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Year-end Strategies to Reduce Adjusted Gross Income

It's never too early to think about moves you can make by year's end to help you reduce your adjusted gross income, or AGI, and save on your income taxes. With only a couple of more months and change to go in 2019, this is a perfect time to start the planning.

Now, you may be wondering why I'm talking about reducing "adjusted gross income" rather than reducing "taxable income", or TI. This is because there are some things that reduce TI (which is good) but don't reduce AGI, while everything that reduces AGI also reduces TI (which is better).

And why is that better you ask? Great question; you are obviously on the ball today! Lowering your AGI has a positive effect on other tax issues that are tied to the level of your AGI.

For instance, medical expenses can only be deducted to the extent in total they exceed 10% of your AGI. Something that lowers AGI potentially frees up more medical deductions, thus lowering TI even more. Another example involves the amount of social security benefits subject to tax. Lowering your AGI can sometimes result in a lesser amount of those benefits being taxed.

These are just two examples; there are others. The important thing to know is that reducing AGI can have a multiplying effect in reducing your ultimate tax burden as compared to simply decreasing tax income through deductions.

With that in mind, here are some ideas you may be able to implement now to reduce AGI:

1) One of the most common and well publicized ways is to contribute to tax-advantaged retirement accounts, assuming you have the earned income to qualify to do so. Most easily accomplished is a contribution to an individual retirement account (IRA). If you are employed somewhere that sponsors a 401(k) plan, deferring salary to it serves to reduce your AGI and may qualify for an employer match to boot.

Other plans include SIMPLE IRAs and SEP accounts for the self-employed. The point is to contribute as much as you can afford; hopefully the maximum allowed. You'll save taxes now while preparing for your future! And the sooner you do it, the sooner the account can start earning tax deferred income.

2) Another idea, especially if you have investments and are charitably-minded, is to donate to charity appreciated securities owned for more than a year rather than giving cash. Why do this? Because you get to deduct the full fair market value of the donated securities without having to pay any tax on the gain. And because it's a charity, the organization doesn't have to pay tax on the gain either. Bonus - if you are a higher income taxpayer subject to the 3.8% net investment income tax (NIIT), this also avoids that additional tax on the gain.

3) Closely related to #2 above, if you are age 70 1/2 of older and have an individual retirement account (IRA) from which you must take a required minimum distribution (RMD), you can donate to charity directly from your IRA in what is known as a charitable IRA distribution (aka charitable IRA rollover) and reap major tax benefits. This is because, unlike taking a normal distribution from your IRA and then making the donation, the charitable IRA distribution is not reportable as income to you in the first place, thus it does not increase your AGI and therefore reduces your tax burden.

Further, the amount still counts towards satisfying your RMD. And, in some cases, making your charitable contributions this way, coupled with the use of the new higher standard deduction amounts, may result in even more tax savings!

4) And while we're on the subject of investments, consider selling off investments in which you have a loss position in your taxable accounts. The loss will offset taxable gains you may have realized during the year. Further, you can deduct up to $3,000 of loss in excess of gains against other types of income, and the loss also will reduce the NIIT discussed above if it is applicable.

5) If you are in business and report on the cash basis, use the tried and true strategy of accelerating business expenses and deferring revenue to the extent you can do so. Prepaying expenses toward year-end typically allows them to be deducted in the current year, including those paid by credit card. And while you never want to do anything that might harm cash flow, billing a customer in early January for work performed or sales made toward the end of this year will defer collections until next year. Of course, this is merely a timing difference, but planned right, it can save you a nice chunk of tax over time.

Adopting these ideas for lowering AGI is an effort worth making. It can save you federal income tax, the NIIT, state income tax and if self-employed, in some cases self-employment tax. Begin now implementing these year-end planning ideas!


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