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5 Smart Year-End Tax-Saving Money Moves

Dana here.

Why is it, every year as fall approaches, we are shocked to find that we are hurtling towards December 31?

As busy as it may get at year-end, make a promise to yourself. Find a way to steal two hours from your day to focus on something that will help you save money before heading into 2020. Sit down and estimate your 2019 taxes.

Once December 31 passes, there is almost nothing you can do about your tax bill. A little planning now goes a long way.

When you project what your tax return will look like BEFORE the year ends, you can identify ways to lower your tax bill over retirement. In our upcoming webinar, 5 Year-Ending Tax Planning Moves, we cover the following five tax planning strategies! 

1. Realize losses that reduce your tax bill
December 31, 2019, is the deadline to realize tax losses if you want to use them to reduce your 2019 tax bill. Investment professionals call this process “tax-loss harvesting.” Harvesting a loss means you will sell investments that have decreased in value and the same day exchange them into a similar investment. By doing this, you capture those losses on paper so they are reported on your tax return, and thus help decrease your income tax bill. This strategy does not work for investments owned inside of a retirement account – only for investments that you own in a brokerage account or other account that is not an IRA, 401(k) or other tax-deferred retirement accounts.

The equity market has been quite volatile this past year. Stocks, ETFs, and mutual funds might be worth less than what you paid for them. Go through your investment holdings and look for things you own that are worth less than what you paid for them. This is called an “unrealized capital loss.” Once you sell the investment, you realize the loss and it will be used to offset any capital gains. Capital losses can carryforward to future tax years!

If you already collect Social Security, a capital loss could be worth even more because lowering taxable income may also lower the amount of taxed Social Security benefits. For one low-income client, the $3,000 capital loss we generated lowered her federal tax bill by $720.

2. Harvest gains that will be taxed at zero

With tax-gain harvesting, in contrast to tax-loss harvesting, you sell investments after they have appreciated. For some taxpayers, gain harvesting can deliver an outstanding return. The deadline for tax-gain harvesting is also December 31.

In 2019 married tax filers with taxable income up to $75,900 (singles up to $37,950) have a zero percent tax rate on long-term capital gains and qualified dividends. If you are at the 0% capital gains rate now, or even the 15% capital gains rate but expect your income to be higher later, you’ll want to realize gains now at the lower rate. If you wait until a later tax year when your taxable income is higher, you’ll pay a higher tax rate on those gains.

Your taxable income includes the gain, so when you are checking to see if this strategy works, calculate your taxable income first without the gain, then you can see how much room you have to realize gains at the lower rate.

3. Convert IRA savings to a Roth IRA at a low tax rate

I’m a big fan of Roth IRAs because the balance grows tax-free and distributions are also not taxed (when you follow the rules). In addition, once you reach age 70 ½, you will be required to take distributions from Traditional IRA accounts. Those distributions bump up your taxable income and could mean your capital gains and Social Security will be taxed at a higher rate. This distribution requirement does not apply to Roth IRAs – unless you inherit one – distributions are required from inherited Roth accounts.

Depending on your income, it could be wise to convert money into a Roth IRA. While you must pay taxes on this money when you convert it, from that point on the funds grow tax-free, no future taxable distributions are required, and you may be able to permanently remain in the 0% capital gains and qualified dividend tax bracket. If you have a lot of assets in non-retirement brokerage accounts, this is just one of many ways converting to a Roth now could pay off later.

Traditional IRA to Roth IRA conversion must be completed by December 31st to count for the current tax year. Under old tax laws, you could convert, and early in the new year if you decided you converted too much you could “recharacterize” or “unconvert.” However, under new tax rules, this option is not available. Once you convert, you can’t undo it.

4. Give it away
For those over 70½, donating all or a portion of your Required Minimum Distribution (RMD) from retirement accounts to charity could be a smart move. The Qualified Charitable Distribution (QCD) provision allows you to give up to $100,000 directly from a Traditional IRA to a charity without having to include the distribution in your taxable income. This also means the IRA withdrawal doesn’t count towards other tax formulas such as the one that determines how much of your Social Security is taxable or if you will pay higher Medicare Part B premiums. If you’re going to gift or tithe anyway, why not do it from your IRA?

5. Increase your 401(k) contribution or fund your HSA

If you're short on deferrals for the year, you can defer nearly all of your last paycheck of the year (or last few paychecks) into your 401(k) or other employer-sponsored plans such as a 403(b), or SIMPLE IRA. Here are the parameters to determine if this makes sense.

Let’s say you’re single and making a decent amount of money. You’ve put $15,000 into your 401(k) plan so far. You do your year-end tax planning and realize your income is such that you are right on the edge of the 24% tax bracket, with some income that will fall into the 32% tax bracket. That means any additional deductible contributions you make will save you taxes at the 32% federal rate. If you could get another $5,000 into your plan, it would save you $1,600 in federal taxes. In such a case it may be worth sacrificing the December paycheck (for now) and using other funds to get by for the month.

You can also see if you’re eligible to make an IRA contribution. And if financially feasible, fund your Health Savings Account (HSA) to the maximum allowable amount. You get a deduction for money you put into an HSA and this money is never taxed if used for qualified health care expenses. And, the good news about HSA and IRA contributions is they do NOT have to be made before year-end. You have until April 15th to get those in for the prior year.

We'll cover these five things and more in our upcoming webinar. Details below!


Next Free Webinar, 5 Year-Ending Tax Planning Moves You Should Look at Now!

We're not going to lie to you. Year-end tax planning requires an investment of time. You come up with an estimate of everything you think will show up on your tax return. And you use that estimate to uncover tax savings ideas that will work for you. 

Here's the secret - you have to do the work before the year-end. We'll be covering the 5 year-end tax planning moves below, what they are, how they work, and how to know if they are a good fit for you.

We'll go over how to:

  1. Harvest capital gains and losses
  2. See if it's a good year to use a Roth conversion.
  3. Find creative ways to fund IRAs, 401(k)s, HSAs, and more!
  4. Give it away - how to use QCDs and Donor Advised Funds
  5. Make a preliminary draft of your tax return

 Consistent tax planning can put money in your pocket. Don't miss this valuable webinar that shows you how it works.

When: Thursday, October 17,2019 5pm AZ/ 7pm CST/ 8pm EST

You can register at: 5 Year-Ending Tax Planning Moves


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Amy Shepard was quoted in this article from MarketWatch: "How to keep your 401(k) running smoothly - no matter what" 



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