Even with the tax-law changes going into effect with the 2018 tax year, investors still have ways to save on their federal tax bills, along with some pitfalls to avoid. In addition, investors can use tax season as an opportunity to address charitable giving and estate planning. As deadlines approach for 2018 contributions to qualified vehicles, such as individual retirement accounts, investors should take some time now to review whether or not they are eligible to contribute before April 15. In addition, with itemization more difficult than in the past, investors might want to consider vehicles such as a donor-advised fund.
Check mutual fund distributions
Tax law changes
At the end of every calendar year, some mutual funds make capital-gains distributions, a result of the fund selling shares of securities. Investors with taxable accounts must include these capital-gains distributions in their reported income for the year. Your brokerage is required to send you a 1099 reporting dividends and distributions. When you file taxes, this income is factored into what you owe. However, don’t let capital-gains taxes drive your investment decisions. If your portfolio is well diversified and designed to meet your risk tolerance and time horizon, stick to your plan despite these taxable distributions.
Utilize tax-loss harvesting
If you sold investments in taxable accounts at a loss in 2018, you may be able to offset any capital gains. Here again, the 1099 forms from your brokerage will be invaluable. Nobody likes to see their portfolio value dwindle, but a potential bright side is the ability to take advantage of these losses at tax time through tax-loss harvesting. Make sure your cost basis for these securities sales are up-to-date. This is relevant for securities both bought and sold. If you sold a position that you held for less than a year, and had a gain, you will be facing a short-term capital gain, which is taxed at ordinary income rates.
Make IRA contributions
The deadline for making contributions for your individual retirement accounts is April 15. This applies to various types of individual retirement accounts, including Roth, SEP, SIMPLE or traditional. Unfortunately, the deadline to contribute to employer-sponsored plans, such as 401(k)s, is Dec. 31. Keep in mind: If you get an extension on your tax return, you do not get an extension on your IRA contribution. To contribute to an IRA, you must have earned income. Money from rental properties, Social Security, pensions or any source besides 1099 or W-2 income is not applicable toward an IRA contribution.
Start your IRA savings for this year
Whether or not you’ve made your 2018 IRA contribution, you can start your 2019 qualified-plan investing now. It may help to stash away a little bit every month, rather than trying to contribute the whole thing in one lump sum. The allowable amount you may contribute rose this year. If you are younger than 50, you may now save up to $6,000 in your IRA, an increase of $500 over 2018. If you are 50 and older, your catch-up amount is an additional $1,000 per year. The limits are even higher for SEP IRAs, which are available to self-employed people or small business owners.
Form a donor-advised fund
One little-known way to maximize both your deductions and your charitable giving is with a donor-advised fund. A donor-advised fund allows individuals to have their money professionally managed and donated to designated charities at a much smaller cost than establishing a foundation. Contributions to these funds are tax deductible. You can donate a whopping 60 percent of your adjusted gross income per year. The donor-advised fund gives you good opportunities for tax planning. Money contributed permanently to a donor-advised fund is no longer considered part of your estate. That means estate taxes don’t apply. This can give plenty of opportunities to incorporate both charitable giving and tax strategies into your estate planning.
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