By Maryalene LaPonsie, U.S. News Contributor
WITH THE WINTER holidays looming, the clock is ticking for taxpayers who want to minimize what they will pay next spring.
“There are very few (tax-saving) things that we can do after the start of the year,” says Ed Zollars, a CPA and instructor with Kaplan Professional Education, which provides continuing education classes and instruction for professional certifications. Most tax tips need to be implemented by Dec. 31 to have an effect on tax-filing this spring. By tax planning now, rather than in December, you won’t have to rush through the process either, Zollars adds.
Get started by using these 10 tax tips to beef up your savings and minimize the amount of federal income tax you’ll pay for 2019:
- Make 401(k) and HSA contributions.
- Avoid taxes on an RMD with a charitable donation.
- Hold off on mutual fund purchases.
- Convert money from a traditional to a Roth IRA.
- Harvest your capital losses.
- Pick up capital gains if you’re in a low tax bracket.
- Invest in Qualified Opportunity Zones.
- Use your flexible spending account balance.
- Bunch your charitable contributions.
- Meet with your tax advisor.
1. Make 401(k) and HSA Contributions
People can make tax deductible contributions to traditional IRAs up to April 15 of next year. However, the door closes on Dec. 31 for 401(k) and health savings account contributions.
“It’s a hard stop,” says Wendy Barlin, a Los Angeles-based CPA and author of “That’s Deductible!: Simple Tips and Tricks to Find More Business Tax Deductions.”
“Whatever opportunities you have at work (for retirement savings), make sure you maximize them before the end of the year,” she says.
Taxpayers with a qualified high-deductible family health insurance plan can deduct up to $7,000 in contributions to a health savings account. Individuals with self-only coverage can deduct $3,500. Those age 55 or older are eligible for an additional $1,000 catch-up contribution.
Tax deductible contributions to a traditional 401(k) are capped at $19,000 for 2019. Workers age 50 and older can make an additional $6,000 in catch-up contributions.
2. Avoid Taxes on an RMD with a Charitable Donation
Seniors who have a traditional 401(k) or IRA must take a required minimum distribution each year once they reach age 70 1/2. Those who don’t need this money for living expenses may want to consider having it sent directly to a charity as a qualified charitable distribution.
“It’s basically a check issued from the IRA and made out to the charity,” Zollars says. This prevents the money from becoming taxable income and could help reduce the amount of Social Security retirement benefits that are deemed taxable, too.
3. Hold Off on Mutual Fund Purchases
People should be wary of buying mutual funds at this time of year if they will be held in a taxable account. You could get hit with a tax bill for year-end dividends even if you just purchased shares.
“That’s how mutual funds work, but people don’t realize it,” says Joanna Powell, managing director in the Boston office of accounting firm CBIZ MHM. To avoid paying additional taxes, consult with a broker before making a purchase to find out when distributions are made.
4. Convert Money From a Traditional to a Roth IRA
Withdrawals from traditional IRAs are taxed in retirement, but distributions from Roth IRAs are tax-free. Plus, Roth IRAs don’t have required minimum distributions, which can also be beneficial for those looking to reduce taxes in retirement.
While money can be converted from a traditional to a Roth account prior to retirement, taxes must be paid on the converted amount. That means people might want to be careful that the amount they convert doesn’t bump them into the next tax bracket.
5. Harvest Your Capital Losses
If you own stocks that have lost money, you can sell them and deduct up to $3,000 on your federal taxes. Just be careful not to violate the wash-sale rule, which would disallow the deduction. This rule states you cannot purchase the same or a substantially similar stock within 30 days before or after the sale.
“Some people think it’s OK if I do it using two accounts,” Zollars says. They may think they can sell a stock from a taxable account and then immediately purchase similar securities in an IRA. However, this is not allowed. “That’s not the way the rule works,” he says.
6. Pick Up Capital Gains if You’re in a Low Tax Bracket
The end of the year is also a good time for some people to sell stocks that have appreciated significantly in value. This can be a particularly good strategy for those who are in the 10% and 12% tax brackets since their capital gains tax may be zero. The stocks can then be repurchased, which resets the basis and minimizes the amount of tax to be paid on future gains.
Even if you’re not in the lowest tax brackets, you may want to sell winning stocks to reset the basis if you’re also harvesting losses. “What you want to do is balance (gains) with stocks that have losses,” Barlin says.
7. Invest in Qualified Opportunity Funds
Taxpayers can defer paying capital gains by reinvesting their money into Qualified Opportunity Funds. The funds, which were created by the Tax Cuts and Jobs Act of 2017, are intended to spur economic development and job creation in distressed communities. If money is held in a Qualified Opportunity Fund for seven years, 15% of the capital gains tax on the investment is eliminated. “It’s a wonderful tax incentive,” Zollars says.
However, like other provisions of the tax reform law, the funds and their tax-savings benefits are scheduled to end in 2026. That means to have your money held in a fund for seven years, you’ll need to make an investment before Dec. 31, 2019.
8. Use Your Flexible Spending Account Balance
Workers who have flexible spending accounts need to use up their balances soon. These accounts have “use it or lose it” provisions in which money reverts back to an employer if not spent. While some companies provide a grace period for purchases made in the new year, others end reimbursements at the close of the calendar year.
9. Bunch Your Charitable Contributions
In 2019, married couples filing jointly have a standard deduction of $24,400. For single taxpayers, the standard deduction is $12,200. The Tax Cuts and Jobs Act of 2017, which nearly doubled the standard deduction, also eliminated miscellaneous deductions, capped state and local tax deductions at $10,000 and limited mortgage interest deductions to loans of up to $750,000.
These changes can make it difficult to itemize deductions unless someone has significant charitable donations. Powell suggests people bunch two years of contributions into a single year, which would allow them to claim an itemized deduction every other year.
For those with the financial means, setting up a donor-advised fund may be ideal. “You get the deduction in the year you move the money (into the fund),” Powell says. However, charitable gifts from the fund can be spread out over time.
10. Meet With Your Tax Adviser
November is a good month to meet with a tax adviser, Powell says. They have finished their October tax filings and may have time in their schedule before the busy tax season starts after the first of the year.
“If you sit down and do some math between now and the end of the year, you can make sure you are in a favorable tax bracket,” Barlin says. An advisor can help pinpoint strategies to reduce taxable income through retirement contributions or itemized deductions. That, in turn, may be key to ensuring households remain eligible for some income-based tax incentives such as student loan interest deductions.
If you don’t regularly use a tax professional, Barlin says running numbers through tax software can be just as beneficial.