As we approach the end of the year and begin making plans for 2019, it is an ideal time to take advantage of tax saving opportunities that are still available for 2018. Here are five ways to reduce your tax obligations before year-end.
- 401k/403b/457 Plans – Max out your employer retirement plan: For 2018, you can contribute up to $18,500 to your employer-sponsored plan (plus an additional $6,000 for those 50 years and older). Check to see if you’re on pace to get to $18,500 by the end of the year. If not, adjust your contribution rate for the last couple of pay checks so that you will get to the max by December 31.
- 529 Plans – Contribute, at least, up to the maximum income tax deductible amount: Each state has its own rules regarding income tax deductibility of 529 plan contributions. If your state offers an income tax deduction for contributions, check to see if you are on pace to contribute at least that amount. In New York, a married couple can deduct up to $10,000 for state income tax purposes. If you are planning to pay college tuition, take advantage by contributing enough to receive the maximum income tax deduction.
- Tax Loss Harvest – Sell investment positions with unrealized losses in taxable accounts: The loss realized by making these trades can be used to offset realized capital gains generated during the year. If realized losses exceed gains, you can deduct up to $3,000 to offset ordinary income. Anything left after that can be carried forward indefinitely.
- Donate Appreciated Securities – For charitable donations, use appreciated securities: This is a wonderful way to do good and do well at the same time. Donating appreciated securities will give you a deduction for the full value of the securities and allow you to offload the tax liability on the unrealized gain. You and your favorite charity can benefit.
- Make a Qualified Charitable Distribution – For those over the age of 70.5, make charitable contributions from your IRA: This is another opportunity to do good and do well at the same time. The IRS allows individuals over age 70.5 who do not need their Required Minimum Distribution (RMD) for spending, to make direct distributions from an IRA to a charitable organization that satisfies the RMD. This allows individuals to avoid generating ordinary income (up to $100,000), and the associated tax liability, while making a charitable donation. This also has the benefit of reducing the size of future RMDs and the taxes that go along with them.
Before year-end, check off all the above items that apply to your situation. They will reduce your taxes and get you off to a great financial start to the New Year….
is the founder and principal of Westchester, New York-based, Fifth Set Investment Advisors LLC, a Fee-Only, SEC registered investment advisory firm. Following a career in equity research, an examination of competing investment management approaches led Ian to create Fifth Set to offer clients customized wealth management strategies built on a foundation of evidence-based financial theory.