In just a few short months, 2019 will be in the rearview mirror and we’ll be welcoming the start of a fresh year. This also means that there isn’t much time left to take advantage of year-end tax planning strategies. Typical advice for this time of year includes charitable giving – or bunching, if your total deductions won’t exceed the higher standard deduction – retirement plan contributions, the QBID deduction, and making capital investments via the Section 179 deduction. Each of those topics will be revisited in a future blog post as there are some changes with updated IRS guidance since tax reform went into effect.
More than the standard year-end planning advice, this post is all about some less talked about ways to lower taxes before the end of the year. Individual taxpayers should look into these and other options and talk to their CPA to learn more.
HSAs and Year-End Tax Planning
A Health Savings Account (HSA) contains a so-called triple tax benefit wherein pre-tax dollars are used to fund it, the investment compounds over time (indefinitely), and qualified medical expenses can be paid for with tax-free withdrawals. Opening an HSA before year-end can reduce overall taxable income for the year, so it’s a helpful and often overlooked tool if your income is hovering near the threshold of a higher tax bracket. HSAs can be used for medical expenses immediately or left to grow for years as a secondary retirement savings tool. Here’s more information about HSAs from a previous Naden/Lean blog post.
Have you heard about Opportunity Zones? This is another creative and potentially lucrative year-end tax planning option. There are substantial savings in deferred capital gains and reduced step-up in basis, especially if a Qualified Opportunity Fund, or QOF, is established before the end of the year. This is because the maximum amount of deferred gains can only be achieved if a QOF is held for at least seven years, and the benefit period ends on December 31, 2026. That makes 2019 the last year to establish a QOF and potentially earn the highest benefit; although investments will obviously still be available in 2020 and beyond. Individuals, partnerships, S-Corps, C-Corps, and estates and trusts can invest in Opportunity Zones. Read more on the Naden/Lean blog here.
Tax Loss Harvesting
If you’ve got low-performing investments – or if you’re looking ahead to the possible slow-down predicted by economists – then employing a tax loss harvesting strategy can be an efficient way to offset gains or ordinary income. Say you have $10,000 worth of stocks that recently lost $1,000. In a normal market, you could hold onto these investments and ride out the market. But in a volatile market, or the end of the year, you could sell them and deduct the loss from either your ordinary taxable income or offset the gain of another high-performing investment account. According to the IRS, you aren’t allowed to buy an asset and immediately sell it just to pay less in taxes. You must retain the asset for at least 30 days to avoid the ‘wash-sale rule.’ Also, you can only use up to $3,000 of a loss to reduce taxable income ($1,500 if married filing separately).
Next, we’ll go into year-end tax strategies where it might make sense to increase your tax obligation as well as moves to make now for a long-term impact. Any questions about year-end tax planning should be directed to your CPA, and Naden/Lean can help. Contact us here.