Five Year-End Tax Tips
With the end of the year fast approaching, let’s remember that we still have time to save on taxes. Even though we can’t control the markets, there are some things we do have direct control of and most are centered around taxes. We know the tax rules today and we can take steps now to help us for tomorrow. Here are five strategies to potentially reduce your tax bill for 2019:
- You may be eligible to contribute to a ROTH or IRA account. The max any individual can contribute for 2019 is $6,000 with a $1,000 catch-up contribution if you are over 50 (for a total of $7,000). There are income limitations, so make sure you talk with your accountant or financial advisor to see if you qualify. Depending on your current income and future projected income a ROTH or an IRA may be suitable, so you may have to do some planning to decide. The good news is that the contribution doesn’t have to be made until the due date of your tax return (not including extensions).
- ROTH conversions can be a good strategy to try and maximize tax free growth. This strategy consists of moving money from a traditional IRA to a ROTH, paying the tax now, and then having the ROTH grow tax free. This strategy can be highly advantageous but needs to be evaluated carefully as raising income over certain levels can create unintended consequences. It is usually most beneficial with households that have retired but have not yet started taking social security. This allows you to convert the traditional IRA at lower tax brackets than if you were collecting all sources of income.
- Tax loss harvesting is another strategy that has been shown to add .3% of additional return to a portfolio over time.¹ Loss harvesting consists of looking through the portfolio and purposefully realizing (selling) any positions that have losses. This not only allows you to use the losses against any gains that you have realized throughout the year, but also allows you to write off up to $3,000 against income. After selling at a loss don’t re-purchase the same security again for 30 days or you will fall trap to the wash sale rule and won’t be permitted to take the loss.
- Gifting your required minimum distribution (RMD) to a charity is another great way to reduce your tax. This is an especially favorable strategy for people who don’t itemize on their tax returns. It allows them to get a deduction for at least part of their charitable gifting when they otherwise wouldn’t get any. Depending on where your income falls it may also reduce the taxable part of your social security, causing a double effect on reducing taxes.
- With the standard deduction in 2019 now being $12,200 for single and $24,400 for married filing jointly, it can be beneficial to bunch charitable contributions. Instead of giving $15,000 to charities in 2019 and $15,000 in 2020, you would want to give $30,000 in 2019 in order to maximize your itemized deductions. Then you would give $30,000 every other year in essence keeping your charitable giving the same yet being able to itemize.
While markets will continue to be unpredictable, taxes can be somewhat controlled so let’s put our effort into areas that we know will offer a guaranteed outcome. There is still time to act and reduce your taxes for 2019, so don’t wait.
¹Kitces, Michael E. MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL, 2014. Evaluating the Tax Deferral and Tax Bracket Arbitrage Benefits of Tax Loss Harvesting. https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitrage-benefits-of-tax-loss-harvesting/