‘Tis the season for busy schedules, endless to-dos and last-minute scrambling to make sure we fit in all of our year-end tasks. In the midst of holiday shopping, gift-giving, and parties, one thing that can easily get lost in the mix is our end-of-year financial to-dos. While the tax filing deadline is still several months away, there are important end-of-year financial strategies to consider now. The following list contains four financial moves to help cut your tax bill and start the new year on the right financial foot.
Tax Cuts and Jobs Act leads to three important considerations
- Consider a Roth Conversion:
Under the new tax laws, we are experiencing historically low tax rates. This has created a rare window of opportunity for investors to convert their tax-deferred retirement accounts to a tax-advantageous option such as a Roth 401k or Roth IRA. Making this strategic move now allows investors to pay less in taxes by converting under the current low rates for 2019. But a Roth conversion may not be the right move for every investor and there are important questions to ask yourself before making the move.
Those questions include: when will you need the money, what is your tax rate, and do you currently have the money to pay the tax on the conversion? It’s also important to note that Tax Cuts and Jobs Act eliminated Roth recharacterizations – which means a Roth IRA conversion can no longer be undone, so it’s crucial that you think through these questions before making any decisions.
- Bunch Large Deductions:
The Tax Cuts and Jobs Act also ushered in a new larger standard deduction. For most taxpayers, they now take the new larger standard deduction of $24,400 for married couples filing jointly or $12,200 for individuals. Because of this, very few taxpayers itemize their deductions, which can eliminate a lot of the tax breaks they have come to rely on.
One strategy to still utilize itemized deductions is by bunching them within one year so that it is beneficial for you to itemize. For example, if you contribute to a charity each year, you might decide to bunch a few years’ worth of donations in 2019. This strategy would also apply if you have large medical bills or a big casualty loss in a qualifying Federal disaster area. By bunching these deductions in 2019, you can take advantage of the tax breaks. Keep in mind that in the following year, you’ll most likely only be eligible for the standard deduction.
- Reduce the Tax on Capital Gains:
Now is a great time to plan out your year-end sales so that you can implement strategies that aim to limit your tax liability. Short-term capital gains taxes apply to profits from a sale of an asset held for one year or less while long-term capital gains taxes apply to assets held for more than a year. It is important to understand the difference because short-term capital gains tax rates are taxed at income rates which are generally higher than long-term capital gains.
Keeping this in mind, you may consider holding a particular asset for another year (or longer) so that you can qualify for the long-term capital gains tax rates. On the other end of the spectrum, don’t forget to factor in any investment losses you had this year — investment capital losses can help offset the taxes you owe on your gains. There is a limit on how much you can deduct for your losses, but the IRS allows you to carry over any excess to the next year if your net capital losses exceeds that limit.
- Consider a Qualified Charitable Distribution (QCD):
If you’re an owner of an IRA and you’ve reached the age 70.5, then you might consider a Qualified Charitable Distribution (QCD) for your charitable donation this holiday season. A QCD is a direct transfer of funds from your IRA to a qualified charity and it’s the best way to gain tax benefits for charitable contributions under the new tax laws. Since the Tax Cuts and Jobs Act was signed into law, most taxpayers no longer receive deductions for their gifts to charity. For those that qualify, a QCD can offset the tax on required minimum distributions, effectively replacing the lost tax deduction you may have been used to in previous years before tax reform.
Tax tips: Conclusion
There are only a few weeks left in 2019 so you must act quickly to implement these financial moves. With tax season just around the corner, you’ll be happy you took the time to do this now rather than facing an unnecessarily high tax bill come April. Some of these strategies can be confusing and difficult to implement on your own, though, so you may consider working with a qualified professional who can help ensure you take the proper steps to reduce your 2019 tax bill.
Investment advisory services offered through AdvisorNet Wealth Management (AWM). Great Waters Financial and AWM are not affiliated. Insurance products provided by Great Waters Financial, a Minnesota insurance agency