Tax moves to consider by year-end

Seize the chance to save on taxes by acting before the end of the year.

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Key takeaways

  • Consider "bunching" charitable donations or medical expenses if it helps you to deduct more income.
  • To help reduce taxable income, consider increasing your contributions to tax-deferred retirement accounts and a health savings account.
  • If you are age 721 or older, don't forget required minimum distributions (RMDs) and consider a qualified charitable distribution.
  • To help reduce taxes on capital gains, consider a "tax-loss harvesting" strategy, which offsets realized capital gains on your investments with realized capital losses.

If you're like many people, you may still be adjusting to the new tax laws that went into effect in 2018. While rates went down for many people, many itemized deductions were limited. That means it's all the more important to get an early start to make the most of tax-saving strategies before year-end.

Here are 5 timely tips to help get your 2019 tax prep off to a good start.

1. Bunch deductions

The new tax laws simplified tax filing for many people by increasing the standard deduction and capping many itemized deductions.

But if you're considering itemizing, to make the most of the potential tax deductions that still exist, consider "bunching." That means concentrating deductions in a single year, then skipping 1 or 2 years. This strategy can work well when your total itemized deductions for a single year fall below the new standard deduction. The catch is that this strategy requires having the financial capacity to pack all of your deductions into one year.

Here's how it could work: Instead of making annual charitable gifts, investors may want to give 2, 3, or even 5 years' worth of donations in a single year, then take a few years off. Focusing all donations in a single year can increase the value of deductions beyond the threshold for a single year, and then the larger standard deduction can be taken in the "skip" years.

Consider the hypothetical example below. This couple, in the 35% tax bracket, makes annual $10,000 charitable donations. Including those donations, their mortgage interest, and property taxes, their itemized deductions would total $25,000—$600 over the standard deduction of $24,400 for married taxpayers filing jointly in 2019. Itemizing gives them $210 in tax savings versus the standard deduction on their charitable contribution each year.

But, if they bunch 3 years' worth of charitable contributions into 1 year, they would exceed the standard deduction by $20,600. By doing this they can save a total of $7,210 on taxes—$6,580 more than they would save by taking the standard deduction for 3 years.

If you're considering a bunching strategy, a donor-advised fund may be appealing. That way you can contribute several years of charitable contributions in 1 year, making the most of the deduction in that year, but spread your giving over multiple years. A donor-advised fund also lets you keep some control over the way your charitable contributions are distributed.

You can also bunch medical expenses. Medical expenses can be deducted if they exceed 10% of adjusted gross income (AGI).

Bunching may work for people who plan to make annual charitable donations but whose itemized deductions fall close to the new standard deduction. Try our calculator to model the potential impact of bunching in different financial situations.

2. Consider a Roth conversion

The tax law passed in 2018 lowered tax rates and changed the income thresholds for different tax brackets. But those changes are set to expire in 2025. If you saved money in a traditional IRA, you may be able to lock in today's rates by converting part, or all, of your savings to Roth accounts.

You may also be able to convert your 401(k) to a Roth account. Read Viewpoints on Fidelity.com: Do you earn too much for a Roth IRA?

Because you pay taxes on your conversion amounts up front, rather than when you withdraw money, you'll owe no taxes on future earnings as long as your withdrawals are qualified. If you believe that your future tax rates may go up, either because of legislative changes or because of higher future income, a Roth conversion could save you money. Another potential advantage: Roth IRAs don't have required minimum distributions (RMDs).

One strategy is to convert up to the limit of your tax bracket. For example, in 2019, a couple with taxable income of $125,000 would have a 22% marginal tax bracket (which tops out at $168,400). So they could convert up to $43,400 before maxing out of the 22% bracket.

Of course, it's impossible to predict future tax law, but income tax rates are now near historic lows, so it may be a relatively good time to consider a Roth conversion. An added benefit of a Roth conversion is tax diversification. The ability to take tax-free2 withdrawals in the future may help manage taxes in retirement.

3. Reconsider the 529

For parents, grandparents, and anyone else worried about paying for education, 529 accounts are a tax-advantaged way to help pay for education expenses. The accounts allow savings to grow tax-deferred, and avoid taxes on gains if used for tuition, room and board, and other qualified expenses. The tax law passed in 2018 allows 529 accounts for the first time to also be used for up to $10,000 of primary and secondary school tuition expenses each year.

Before withdrawing money from a 529, discuss your situation with a financial advisor. In some cases, allowing the money to grow and compound in the tax-deferred account would produce greater tax savings than tapping it early. And, in some cases, the timing and amount of withdrawals for college, or other qualified uses, can have financial aid and tax ramifications.

Read Viewpoints on Fidelity.com: The ABCs of 529 savings plans

4. Remember municipal bonds

For most people, the new tax rules lowered their tax rates and bills—but not for everyone. For some higher income taxpayers, particularly in high tax states, tax bills are going up. For anyone who is concerned about taxes, now may be a good time to reconsider the role of tax-exempt municipal bonds in their portfolio.

Bond interest is typically taxed at ordinary income tax rates—that's up to 37%, and in some cases there could also be a Medicare surtax of 3.8%. Interest from tax-exempt municipal bonds is generally free from federal income taxes, and in some cases state and local income taxes as well.3

That can make interest from tax-exempt municipal bonds an appealing alternative to traditional bonds in taxable accounts, particularly for higher earners.

5. Remember the fundamentals: retirement, RMDs, and tax-loss harvesting

Many important tax rules were unaffected by the 2018 tax law, including those governing retirement savings accounts, tax-loss harvesting, required minimum distributions (RMDs), and charitable distributions. Here are some reminders:

Max out retirement and health savings accounts: Pre-tax contributions to a traditional 401(k), 403(b), or similar workplace retirement plan can generally reduce current year taxes.

The 2019 contribution limit is $19,000. People over age 50 can contribute an extra $6,000, for a maximum contribution of $25,000. The contribution limit increases to $19,500 for 2020; the catch-up limit rises to $6,500.

Be sure to act quickly if you want to contribute more to your workplace savings plan. The deadline is December 31 for this year's contributions.

A Simplified Employee Pension (SEP) IRA offers potential tax breaks similar to those of a 401(k). The maximum contribution for this year is $56,000 or 25% of eligible income, whichever is less. You'll have until the tax filing deadline, April 15, 2020, to make contributions to a SEP IRA for the 2019 tax year.

Contributions to a health savings account (HSA) reduce taxes too. The IRS maximum annual contribution limit for HSAs in 2019 is $3,500 for those individuals electing single coverage under an HSA-eligible health plan (also known as an HDHP—high deductible health plan), and $7,000 for those electing family coverage. Individuals aged 55 and older may contribute an additional $1,000 (this applies to both single and family HDHP coverage). Family coverage includes any level of coverage other than self-only coverage, if offered by the employer.

The deadline for 2019 contributions to an HSA is April 15, 2020.

Take required distributions and consider a qualified charitable distribution: The deadline for taking a 2019 RMD is December 31, unless you turned 72 this year, in which case you get a grace period until April 1 of next year to make your first withdrawal. Don't miss it—the penalty for missing your RMD from tax-deferred retirement accounts like a traditional IRA or 401(k) is up to 50% of the shortfall.

Want to donate to charity when age 72 or older? Consider a qualified charitable distribution (QCD). It's a direct transfer of funds from your IRA custodian and payable to a qualified charity, which counts toward your RMD for the year, up to $100,000. It's not included in gross income and does not count against the limits on deductions for charitable contributions. These can be significant advantages for certain high-income earners, but the rules are complex—be sure to consult your tax advisor.

Capital gains and tax-loss harvesting: A loss on the sale of a security can be used to offset any realized investment gains, and then up to $3,000 in taxable ordinary income annually. You may sell for a loss to offset gains, and then reinvest the proceeds to maintain your investment strategy, but be sure to comply with IRS "wash sale" rules. Tax-loss harvesting needs to be completed by December 31.

Read Viewpoints on Fidelity.com: 5 tax-loss harvesting considerations

Revisit your estate plan: If anything in your life has changed, or if it's been a few years since you last checked, revisit your estate plan and make sure your beneficiaries are up to date.

The bottom line

The end of the year is a good time to check on your financial accounts. The last day of December is sometimes a significant deadline so it can make sense to do some year-end housekeeping, including evaluating tax strategies and making plans for the coming year.

Of course, tax planning is not a one-and-done year-end exercise. To help reduce taxes, it makes sense to be planning throughout the year. Need help? Fidelity advisors can help you build a tax-smart investing plan that works for you.

Next steps to consider

Call or visit to set up an appointment.

See how helping charities can also enhance tax benefits.

Explore strategies to help reduce taxes on income, investments, savings, and more.

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