As I am finishing up my year-end client tax meetings, I wanted to share a few brief strategies you may be able to implement to reduce your tax bill for 2019. I’ll also include a few reminders just to ensure things don’t get missed.
“I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.” – Arthur Godfrey
Given the choice, everyone wants to pay less taxes, right? I’ll try to keep these short – if you have questions, feel free to reach out.
#1. Tax-Loss Harvesting
Do you have any funds in your taxable accounts that you can sell at a loss? For many investors, thanks to the 10-year U.S. bull market, you may not. But if you do, this might be a great time to harvest some of those losses to either offset some gains and rebalance or to take up to a $3,000 taxable loss.
#2. Gifting Appreciated Assets to Charities
If you are planning to give to any charities to finish out the year, consider giving appreciated assets in lieu of a cash gift. By giving a long-term appreciated asset (must be long-term), you can get full credit for the gift up to 30 percent of your adjusted gross income. This will remove the appreciated asset from future taxation and qualify for a current charitable deduction.
#3. “Bunching” Charitable Gifts
With the increased standard deduction and state and local tax deduction limitations, many retirees find themselves taking the standard deduction instead of itemizing. This can make “bunching” your charitable deductions a worthwhile strategy to consider. If you tend to give regularly to a church, university, or other non-profit, you may consider combining your 2019 and 2020 giving into this tax year or the next. In this way, you may alternate itemizing and taking the standard deduction each tax year.
If you prefer more systematic giving as opposed to lump sum giving for whatever reason, consider “donating” those funds into a Donor-Advised Fund. This can allow you to bunch your gifts for tax purposes now while maintaining your traditional giving schedule.
#4. Make a Qualified Charitable Distribution
If you are 70.5 or older and have Required Minimum Distributions(RMD) to take that you don’t need and are charitably inclined, you might consider making a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from your IRA custodian payable to a qualified charity.
This strategy can satisfy three goals at once – you satisfy the RMD requirement, you avoid the accompanying taxes and you can give to an organization you care about. Win. Win. Win.
#5. Make a Traditional IRA Contribution
If you or your spouse are younger than 70.5 and are still working (have earned income), you are still eligible to contribute to a Traditional IRA. By making a contribution to a TIRA, you can potentially receive a tax deduction and defer the taxes on the growth of those contributions.
Important Note: Not all IRA contributions are deductible as there are income qualifications. If you are making non-deductible IRA contributions, be sure to file a Form 8606 on your return for 2019. And if you have previously made non-deductible contributions (exceeded income limitations for the tax deduction) in years past, you will want to verify that your “non-deductible basis” is accurate on your existing Form 8606. This is an oversight I see on a regular basis, so be sure to check on this!
Also Note: It may make more sense, both from a tax and retirement perspective, to forego the current tax benefit and contribute to a Roth IRA. Even if you exceed income limitations, you may be able to contribute via a “backdoor” Roth IRA contribution.
#6. Max Out Your Health Savings Account
If you are participating in a High-Deductible Health Plan through work (and have not yet signed up for Medicare), you are eligible to contribute to a Health Savings Account(HSA). An HSA has the trifecta of tax benefits. You do not pay taxes on the funds you elect to put into the HSA (thereby reducing your taxable income), you defer taxes on the growth, and if the funds are withdrawn for eligible expenses, they come out tax-free. You can’t beat that deal!
If you can afford to pay for your health-care expenses using other assets during your working years, this benefit can be enormous. Even if you are late in your career, there can still be significant value in maxing out your HSA. For example, if you have three years to go, you can fund up to $8,000 per year (for a family) if you are 55 or older. By funding this account for even a few years (and not spending these dollars), you can effectively create a catastrophic medical bucket that can be tax-free dollars thereby adding another layer of tax-bracket control in retirement.
There is a lot to say on this topic and plan to write a much more in-depth post, so I’ll leave it at this for now. If you have questions, feel free to reach out.
#7: Roth IRA Conversions
This strategy can be particularly useful if you’ve recently retired but are waiting to collect Social Security. You may use this time to creatively re-structure your portfolio to give yourself more tax flexibility down the road further into retirement. Depending on your tax-bracket situation, it may make sense to pay taxes now (while you are in a lower bracket) via Roth Conversions to ensure future tax-free growth and enhance your tax-diversification. This is another complicated one, so you will likely want/need expert guidance on how to do this properly.
#8: Purposefully Realizing Capital Gains
You may choose not to complete any Roth IRA conversions and that’s fine. An alternative strategy is to voluntarily recognize some taxable gains in your taxable accounts at a time where your effective tax rate on those gains could be 0%. This is entirely dependent on your specific tax situation. But if this is you, it’s a real no-brainer.
#9: Other Strategies
There are other areas where you may be able to save on taxes, or that may be smart to take advantage of depending your tax situation such as funding a 529 plan for grandchildren (potential state tax deduction), properly timing the exercise of company stock options, or investing your taxable fixed income portfolio into municipal bonds. But those listed above seem the be the most common ways retirees can move the needle.
#1. Don’t Forget Your Required Minimum Distributions (RMD).
If you have not yet taken your RMD for 2019, you might consider taking it now. The penalty for missing your RMD is the steepest fine the IRS levies at 50% of the required distribution that is not taken, plus interest of course.
#2. Spend Flex Savings Account Funds
If you are part of a traditional health plan, be sure to spend any funds you have in a Flex Savings Account as these funds expire at the end of the year.
#3. Gifting Assets to Others
If you intend to gift any assets to your children or others you care about, you can gift up to $15,000 per person tax-free and without the requirement of filing a gift-tax return. This means that you and your spouse could effectively gift up to $60,000 to your child and their spouse should you want to for whatever reason.
These are the primary strategies I see where you might be able to reduce your tax bill. If you have one that I’ve overlooked or have questions, please send me a note here.
Please Note: This post is not advice. I am NOT a CPA or accountant and do not play one on the internet. Please consult with your tax accountant, attorney or another qualified individual if you are considering the above strategies. Please see additional disclaimers here.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.
Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.
Raymond James does not provide tax or legal services.
Join the Retirement Field Guide Newsletter
Subscribe below to get Ashby's list of the best retirement resources from around the web.
I am a Financial Advisor in Pittsburgh and a CERTIFIED FINANCIAL PLANNER™ professional with Shorebridge Wealth Management. I enjoy helping clients and readers find sensible answers to retirement’s big questions. If I can answer any questions for you, feel free to Contact Me or if you think you might be a fit for our practice, see Who We Serve.