Plan Now, Save Later! (Part 2)

By Andy Johnson, CPA, Principal

Welcome back for Part Two! In Part 1, we discussed the strategy of Batching Your Itemized Deductions (click here to read Part 1), and we hope this has kick-started your Tax Planning Season.  In Part Two, we will highlight a few alternative strategies you might consider in order to cut down on your April tax bill.   

Max Out Your Retirement Account

Who would you rather pay, yourself or the government? I’m willing to gamble that you chose yourself. If you did, then one of the easiest moves you can make is to increase your retirement savings via a deductible contribution.  If you are part of an employer plan (i.e. 401k, 403b, etc.), you should consider increasing your deductible contribution to your retirement account (maximum salary deferral for 2019 is $19,000). 

If you are self-employed, you are really in the driver’s seat as to how much you are able to deduct now, in order to save for your future retirement.  As a sole-owner, with no employees, it is much easier to reach the annual maximum retirement contribution levels (employee/employer maximum for 2019 is $56,000) and super-charge your retirement savings, while also reducing your current tax burden.  However, it is imperative that you consult with your accountant, not only on which type of account might be best for you (i.e. a SEP IRA, or possibly a Solo 401k), but more importantly have your accountant help you determine the maximum amount you are allowed to put into your retirement account on an annual basis. 

Click here to read Plan Now, Save Later (Part 1)

Max Out Your Health Savings Account

In this age of rising healthcare costs, including rising deductibles, co-pays, and co-insurance obligations, would you rather pay your qualified out-of-pocket (unreimbursed) medical expenses with pre-tax funds or post-tax funds?  Put another way, would you rather pay $3,000 to cover your $3,000 deductible, or would you prefer to pay $4,286 (could be more or less depending on your own personal tax situation) to cover your $3,000 deductible.  I’ll wager everyone would prefer to pay $3,000 and keep the extra money in their pocket, right?    

Well if you are covered by a qualified high-deductible (H.S.A. eligible) plan, you may be in luck.  The easiest, and most tax advantageous way to contribute, is via your paycheck if your employer allows you to make contributions to an H.S.A. account.  However, if your employer does not allow you to contribute to an H.S.A. account via your paycheck, you are still able to open an account and make contributions (similar to contributing to an IRA).  

The rules around H.S.A. accounts are complex, especially if you have a spouse who receives different benefits from their place of employment.  Please be sure to consult your tax advisor to figure out whether you are eligible to pursue this approach.

Qualified Charitable Distributions

With the recent tax law changes, the ability to make a qualified charitable distribution, using your Required Minimum Distribution (RMD), is a very important consideration for all taxpayers, regardless of income level. After reaching 70 ½ years of age, when you are required to take an RMD from your retirement account(s), you can work with the custodian to have the distributions sent directly to a qualified charity (up to $100,000). The key benefit of this strategy is that these distributions count towards satisfying the annual RMD requirement plus the amount directed toward the charity is not included on your individual tax return as taxable income.  Since the portion of the RMD directed to charity is not included in income, this is a way to get a “deduction” for your charitable giving – especially if you are a standard deduction taxpayer.  A definite win/win, for most taxpayers!

Click here to read Plan Now, Save Later (Part 1)

Reducing Capital Gains

If your investment portfolio has generated a lot of realized (taxable) capital gains you have a couple of options that you can consider:

• Loss Harvesting – This option requires working with your financial advisor.  While working with your advisor, you are looking to see if there are positions that no longer fit with your investment strategy/goals.  If these positions are losses, even better, as the capital losses you generate will be available to offset taxable capital gains previously recognized (meaning you will pay less tax).

• Qualified Opportunity Zones – This little talked about inclusion in the new tax code could actually have huge tax deferral implications. For starters, the immediate tax-saving consideration is that this strategy allows a taxpayer, who makes a qualifying investment, the ability to defer the gain until the filing of their 2026 tax return (or the year the qualifying investment is sold, whichever comes first).  While immediate tax deferral is nice, the true power of this strategy is it also allows the taxpayer the ability to (1) exclude some of the originally deferred gain from taxation when the tax bill comes due in 2026 (or earlier, if the investment is sold and has met the requisite holding period requirements), as well as (2) allowing the taxpayer the ability to not pay any tax on any of the appreciation in the qualifying investment when sold (if the qualifying investment is held for more than 10 years). 

As you can see, this is a very powerful tax saving strategy.  However, there are still unknowns in this area as the Treasury/IRS have not issued Final Regulations for this strategy yet.  A taxpayer who is interested in pursuing this strategy should work closely with their financial advisor, to make sure it fits into their investment strategy/goals, and their accountant to make sure they meet the strict requirements needed in order to qualify for this tax deferral strategy.

Conclusion

The approaching holidays are a busy time full of friends, family and gatherings. Make sure you take at least a little time to see if you can apply some of these tax-saving strategies.  While effective when implemented properly, some of these strategies may require immediate action, so delaying could mean you will be barred from using them for 2019. If you’re in doubt on what strategies you may be able to implement, or if you just want to take a detailed look at your individual situation, reach out to us for assistance with your year-end tax planning.

Click here to read Plan Now, Save Later (Part 1)