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Tax Day may be the biggest deadline of income tax season but it’s hardly the only one. Tax deadlines fall throughout most of the year.
Several key deadlines arrive on Dec. 31, for example — and missing them can mean lost opportunities to lower your next tax bill.
It’s particularly important to be mindful of these deadlines this year. Last year’s tax reform legislation will have a major impact on your 2018 tax return — the one due in April 2019.
Here are several examples of tax deadlines and key dates that arrive on Dec. 31 rather than in April — and what you should know about them in the wake of changes in the tax code:
1. Stash cash in a workplace retirement account
Uncle Sam cuts a break to folks with certain tax-advantaged accounts, including individual retirement accounts (IRAs). You can contribute to such accounts as late as Tax Day — in April 2019 — and still be able to write off these contributions on your 2018 taxes.
For folks with employer-sponsored retirement accounts, such as a 401(k), the contribution deadline is generally Dec. 31. So, if you have a retirement plan through your workplace and want to use it to get a deduction on your next tax bill, stash cash there by year-end.
Keep in mind that contributions qualify for a deduction only if they are made to a “traditional” or “regular” account. Contributions to Roth accounts are not tax-deductible at the time of the contribution.
This is not to say a traditional account is always the best place to put your retirement savings, though. You might be better off saving in a Roth account — especially now. Due to tax reform, there is new reason to consider contributing to a Roth account. We detail this in “New Tax Rates Mean It’s Time to Rethink Retirement Strategy.”
2. Take your required minimum distribution
If you were 70½ or older going into 2018, Dec. 31 is the date by which you must take your required minimum distribution (RMD) for the 2018 tax year.
An RMD is a minimum amount of money that the IRS requires you to withdraw from certain tax-advantaged accounts each year after you reach a certain age. Tax reform did not impact RMDs, but it’s still important to take your RMDs in accordance with IRS regulations because Uncle Sam generally fines folks who fail to do so.
The exact amount of an RMD is determined by an IRS formula. The federal agency offers worksheets to help you calculate RMDs.
Most types of tax-advantaged accounts are subject to RMDs. One exception is Roth IRAs, which are not subject to RMDs during the account owner’s lifetime.
3. Get a divorce
We are not encouraging divorce. But if you have already started divorce proceedings or are even considering divorce, Dec. 31 is a critical date: It can determine whether any alimony payments you may end up owing are tax-deductible.
Currently, folks who pay alimony can generally deduct those payments on their federal income taxes. That’s about to change for some taxpayers, though.
The federal tax code overhaul repealed the tax deduction for alimony payments. This change generally applies to divorce agreements and decrees signed after Dec. 31, 2018.
So, the cold, hard truth is that if you are considering divorce or entering divorce proceedings and you might be required to pay alimony post-divorce, it behooves your finances to sign off on the divorce this calendar year.
Here’s an example from the IRS’ Taxpayer Advocate Service, which has launched a website that details the recent tax code changes in relatively plain English:
“Emma pays Noah $1,500 of alimony per month based on their divorce decree signed in 2016. Emma will continue to take a deduction of the same amount in tax year 2018 and in future tax years. … Note: If Noah and Emma had divorced after 2018, Emma wouldn’t get a deduction for the alimony she paid to Noah.”
4. Donate to charity
If you wish to donate money or items to charity and write the donation off on your next tax bill, you must make the donation by Dec. 31. Just understand that you won’t necessarily get the benefit of this deduction.
Charitable donations are what the IRS considers an itemized deduction. That means you would have to itemize your tax deductions, rather than take the standard deduction, to be eligible for the charitable donation deduction.
The tax code overhaul significantly increased the size of the standard deduction starting this year. As a result, far fewer taxpayers are expected to itemize their tax deductions, as we reported this spring.
It generally only makes sense to itemize deductions if the total amount of your itemized deductions exceeds the amount of your standard deduction. But such instances will be less likely now that the standard deduction is so much larger under the revised tax code.
Are you taking any steps this year to lower your 2019 tax bill? Let us know by commenting below or on Facebook.