Updated: May 7, 2020
It is hard to believe but 2019 is quickly coming to a close. Before the holidays take up most of your time, now is a great time to think through a few smart options for minimizing your tax bill. Below are a handful of easy reminders to think through before the new year.
Maximize your retirement contributions
An easy place to start is with your pre-tax retirement contributions towards retirement plans like a 401(k) or 403(b). In 2019 you can contribute up to $19,000 and an additional $6,000 in catch up contributions if you are 50 or older. If you have extra cash available and haven’t reached the maximum yet, now would be a great chance to increase your savings for the last few paychecks or potentially defer part of a year-end bonus.
Open a Donor-Advised Fund (DAF)
For those who are charitably minded and are in a higher tax bracket currently than you expect to be in the future (ie. close to retirement or having recently received a large bonus/contract/gain/etc.), a donor-advised fund could be a great fit. A DAF allows you to contribute now and get the deduction this year but then donate the funds over time. This is especially powerful when combined with donating an appreciated asset such as a stock with a large gain. You get a deduction (if itemizing) for the full market value and avoid having to pay the capital gain tax. If you think a DAF might fit your needs, feel free to reach out to us and we can work with your CPA to optimize this strategy.
Consider a Roth Conversion
For those who are in a lower tax bracket than normal or have an excess of retirement funds, a Roth conversion strategy could be appropriate. When converting a pre-tax account like an IRA to a Roth, we are choosing to pay the taxes now and then never again. This can make a significant difference if you are expecting to be in a higher tax bracket later and/or don’t need the funds for typically a minimum of 10-15 years. This can also potentially help prevent required minimum distribution issues (RMDs) down the road.
Tax Loss Harvesting
In taxable accounts, it is worth considering selling off positions that are at a loss to offset any gains you have had during the year. However, if you want to re-invest in the same exact security, it is important to wait at least 30 days to avoid the wash sale rule. If you wind up with a net capital loss, it is possible to use up to $3,000 to offset ordinary income and roll the rest over to the next year (a loss carry forward).