WOW! Somehow, 2019 totally flooooooooooooooooooown by!?
Not sure where the time went? But with the fiscal year-end quickly approach, it’s the time to start thinking about your taxes.
And it’s especially important to evaluate your tax situation NOW! Because there are several tax-sheltering measures you can take before December 31st. Measures with the potential to lop a sizable sum off of your 2019 tax bill.
And toward that end, here are 10 tax-savings tips…
1. 401k + Health Savings Account Deductions
While you technically have until April 15th to make 401k contributions, December 31st is the deadline for Health Savings Plan deductions. This program allows you to set aside money (tax-free!) to cover medical bills after you retire. And with skyrocketing medical costs, HSA contributions are a very wise investment in your future.
2. Make Charitable Donations to Avoid Required Minimum Distribution Taxes
If you’re over 70 years of age, you’re required to take an annual distribution from your 401k + IRA plans. And those distributions count as taxable income. If you don’t need these funds to cover living expenses, you can funnel the cash directly to a charity through a Qualified Charitable Donation. Simply sign-over the money to the qualified charity of your choice and you’ll avoid any income taxes on those dollars.
3. Wait Until Next Year Before You Buy a Mutual Fund
Mutual funds held in taxable accounts are subject to subject to taxes for year-end dividends. Thus, even if you just bought a fund, you’ll still be on the hook for taxes on any dividend payments.
4. Shift Retirement Funds From a Traditional IRA to a Roth IRA
Unlike traditional IRAs, Roth IRA distribution taken in retirement aren’t taxed. Additionally, Roth IRAs don’t have minimum distribution requirements. In turn, this allows you to shelter more of your money in retirement. All of this said, however, taxes must be paid on IRA funds converted into a Roth. So, it’s important to take care of the amount you convert doesn’t push you into a higher tax bracket.
5. Offset Capital Losses
If you own stock that’s lost money, you can sell those shares and deduct up to $3,000 of the proceeds off of your federal income taxes. Just don’t get caught violating the “wash-and-sale” rule. This SEC regulation forbids purchasing the same stock, or markedly similar stock, within 30 days of the sale.
6. Take On Capital Gains if You’re Positioned in a Low Tax Bracket
If you’re in the 10% -12% tax bracket, year-end is a good time to sell top-performing stocks that have significantly appreciated in value. If you’re positioned in this low-tiered tax bracket, there’s unlikely to be any capital gains. And you can buy back the stocks in the next fiscal year, which resets the basis and limits income tax liabilities on future gains. This strategy may make sense even if you’re not in the lowest tax bracket if you’re looking to offset capital losses. Resetting the basis on high-performance stocks balances your capital losses.
7. Invest in a Qualified Opportunity Fund
Created by the Tax Cuts and Jobs Act of 2017, investments in Qualified Opportunity Funds allow you to defer and ultimately reduce your capital gains taxes. These funds were designed to prompt investment in economically challenged communities by creating qualified Opportunity Zones. If you hold an investment in a Qualified Opportunity Fund for at least 7 years, you can eliminate 15% of your resulting capital gains taxes.
8. Zero Out Your Flexible Spending Account
If you’re an employee with a Flexible Spending Account, you must spend any remaining balance before the year’s end. Otherwise, due to the “use or lose it” nature of this account, the money will revert to your employer.
9. Bundle Two Years’ Worth of Your Charitable Donation
The 2017 Tax Cuts and Jobs Act eliminated miscellaneous deductions, capped deductions for state and local taxes at $10,000, and limited interest deductions have been limited to loans of up to $750,000. These changes make it far more difficult to itemize your deductions without significant charitable donations. One strategy to overcome these caps and limits is to bundle two years’ worth of deductions in a single year. This allows you to itemize your deductions every other year.
10. Meet With Your Professional Tax Advisor Before The Year’s End
Now is the time to review your finances with a tax specialist. This is the perfect opportunity to confirm you’re in a favorable tax bracket for the year, as well as identify any potential itemized deductions or retirement contributions that can reduce your tax basis.
Have Questions About Reducing Your 2019 Taxes?
Wondering if there are additional deductions you can take advantage of to reduce your tax basis before the fiscal year winds up?
By all means, drop me a line here…
Looking forward to hearing from you!