6 Smart Tax Moves to Ensure a Happy New Year

6 Smart Tax Moves to Ensure a Happy New Year

by Brendon Pack, January 2019

The holidays may be over, but the gift giving continues. That is, the gift you give to yourself by maximizing your tax deductions and reducing your overall tax bill.

Here are six smart moves you should consider as tax season approaches.

1. Take advantage of retirement accounts and HSAs.

Think of this as investing in yourself. Contributing to a retirement account can significantly reduce your tax bill while allowing you to put aside money for later. If you are 50 or older, you can make additional, catch-up contributions to most retirement accounts, offering you even more tax benefits.

Don't forget about your health savings account (HSA) either. Whether you take advantage of one through your employer or you set up one with a provider, you can save on tax dollars by contributing pre-tax funds to an HSA to cover qualified medical expenses throughout the year.

2. Group deductions to get the maximum tax break.

The Tax Cuts and Jobs Act of 2017 (TCJA) essentially doubled the standard deduction available to taxpayers on individual tax returns. Many tax filers who used to itemize their deductions will find the standard deduction to be a better deal for them.

Another way to tackle this issue, though, is to accumulate as many deductions as you can in certain years so that itemizing in those years becomes preferable to taking the standard deduction. Consider clumping together charitable donations, home mortgage interest, state and local taxes, and other deductions into one year to see if you surpass the standard deduction. But be aware of new changes to the tax code because the TCJA eliminated some deductions and capped the deduction for state and local taxes, so make sure you understand what you can and cannot itemize.

3. Harvest capital gains and tax losses.

Taking a loss on an investment is never easy to accept. But the good news is that the TCJA didn't change the rules for tax-loss harvesting. If you sell a security and realize a loss, you can use that loss to offset any investment gains, and then to offset up to $3,000 in taxable income you make in that year.

Under federal law, you can sell a security for a loss to offset gains, and then reinvest the proceeds to maintain whatever investment strategy you've established. However, you can't participate in a “wash sale," which is when you sell a security and then buy or option a nearly identical security within 30 days. This rule applies to spouses and companies as well. Sales of securities relative to tax-loss harvesting must be completed by December 31 of the tax year in question.

4. Optimize education savings.

As education costs continue to escalate, it makes sense to plan ahead, and education savings can also help to shave your tax bill this year. Think about setting up an education savings account, commonly called a Section 529 plan. Any money you put into this account is tax-free. Many states even allow you to deduct this investment from your state income tax.

And this applies to all levels of education, not just college. The TCJA expanded Section 529 plans to include the use of up to $10,000 each year for elementary and high school costs at public, private, or religious institutions. Education account money can be used for tuition, room and board, books, and other qualified expenses.

5. Take the required IRA distribution.

You worked, and you saved, so don't forget to reap the rewards. If you reach the age of 70½ in the coming year, you will generally need to take required minimum distributions (RMDs) from your individual retirement account (IRA) by year-end. If you have a 401(k), profit-sharing, 403(b), or other defined contribution plan, you generally have until April 1 of the following year to take your initial distribution. Roth IRAs are the exception. Since you already paid taxes on that money, you never need to take an RMD.

If you don't take the RMD by the required date, you face a stiff penalty. You may have to pay a 50 percent excise tax on the amount not distributed. If you don't want to withdraw the funds for yourself, you can always set up a qualified charitable distribution, which automatically transfers money from your retirement account to a charity of your choice, and which counts against the RMD amount you are obligated to take.

6. Consider a Roth IRA.

The TCJA reduced income tax rates to historically low levels. It also changed the income thresholds for different tax brackets. With those changes set to expire in 2025, you have an opportunity to lock in lower tax rates now by converting part of your traditional IRA to a Roth IRA.

With a Roth IRA, you pay taxes on your conversion amount up front, rather than when you withdraw the funds. Any qualified withdrawals you make from your Roth IRA in the future will be tax-free. If tax rates go up, you may have saved tax dollars by doing the conversion.

A knowledgeable tax accountant can help you plan the best tax strategy for your specific situation. And with a few informed tax moves, you'll set yourself up for the happiest of years to come.

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