As we head into in the holiday season, let’s take a quick look at end-of-year tax considerations and strategies to help you maximize returns and minimize your tax bill.
Sell losing investments to offset gains
As the past few weeks have demonstrated, markets can be volatile and highly unpredictable and so even a well-managed portfolio of diversified holdings occasionally includes a weak or underperforming stock, ETF or mutual fund.
When this is the case, a valuable end-of-year tax strategy called “tax loss harvesting” may be worth considering for taxable accounts, depending on your situation. This strategy entails selling underperformers or losing positions in stocks and mutual funds, in order to realize losses that help cancel out tax on capital gains.
If your losses outweigh your gains, you can use up to $3,000 of excess loss to cancel out ordinary income, lightening the tax bill.If you realize more than $3,000 in excess loss, you can carry said losses forward year after year until you can use them/offset them with gains.
Give tax-free financial gifts
It may surprise you to learn that until December 31st, you can make a financial gift to any number of individuals without having to file for a gift tax return, albeit with a few limitations. If you file as an individual you may give a gift of up to $15,000 to as many people as you like, or up to $30,000 per recipient if you file jointly with a spouse.
Another year-end idea is to make a financial gift in the form of a 529 plan contribution, which we touched on in an earlier post, 5 Tips to start saving for your child’s college education.
A 529 plan is an education savings fund to which you may contribute up to a lump sum of $75,000 (and then nothing for five years) or $15,000 per year (currently). A 529 plan grows tax-deferred and the contribution may be tax-deductible (though not in Texas as we have no state income tax). Further, you can spend it tax-free as long as the funds from the account are dispersed for qualified expenses related to higher education, such as tuition, books, room & board.
Consider the standard deduction
While taking itemized deductions may have made sense for you in past years, it’s important to take into consideration changes to the tax code in 2018. One of the greatest changes effectively doubled the standard deduction, coming up to $24,000 for couples filing together, or $12,000 for single filers.
Additionally, changes to the 2018 tax code put in place new limits on itemized deductions, including a cap on property tax and SALT (State And Local Tax) deductions. Between these changes and the increased limit for standard deductions, itemized deductions have become less valuable for many filers.
Spend down money in your FSA
Many folks choose to put money into a Flexible Spending Account (FSA) each year. These are tax-free dollars that may be spent toward copayments, deductibles, some medications, and other health care costs.
If you haven’t used all your FSA funds, you should spend them before the year’s end, as unspent dollars in your FSA generally don’t roll over to the next year, with some exceptions.
If you do end up with unspent money in your FSA, check with your employer, as they may opt to roll up to $500 into the next calendar year.
Contribute to retirement funds
If your budget allows it, one of the best things you can do to set yourself up for long-term financial security is to increase or max out contributions to your retirement fund by the end of the year.
Money contributed to a 401(k) or similar retirement savings plans (excluding Roth IRAs and Roth 401ks) reduces your taxable income and grows tax-deferred. This effectively lowers your tax bill, and allows you to take advantage of long-term interest compounding.
While many retirement plans are tax-deferred, with a Roth IRA you invest after-tax dollars, meaning withdrawals are 100% tax free upon reaching eligible withdrawal age. Contributions to an IRA for tax year 2018 can be made until April 15, 2019. You may contribute a maximum of $5,500 to an IRA for 2018, or $6,500 for account holders over the age of fifty.
Plan to take IRA distributions (RMDs)
Speaking of retirement funds, it’s important to note that you are required to start taking minimum distributions from a traditional IRA by April of the year you turn 70 ½ years old. If you don’t begin taking minimum distributions, you trigger steep financial penalties.
If you fail to take distributions on time, you will be charged a 50% tax on the amount you should have withdrawn, and the amount in the account at the beginning of the year. Moving forward, annual withdrawals are required to be complete by December 31 to avoid this penalty.
Contact Holdfast Wealth Management today with any questions you have.