Although tax season might seem as if it’s a long way off, tax planning in the months before year-end allows you to take advantage of strategies that might help reduce your income tax obligation. Reviewing commonly used strategies will help you identify those that might be useful to you.
Capitalize on Winners
Your investments are a good starting point for implementing tax-saving strategies. You can benefit from favorable tax rates on long-term capital gains by selling and taking profits on appreciated securities you’ve held longer than one year. Long-term gains are currently taxed at a maximum rate of 15% for most taxpayers and 20% for taxpayers with taxable income of over $425,800 ($479,000 for joint filers) in 2018.
Cut Your Tax Bite With Losers
Investments that have lost value and have consistently underperformed a benchmark over time may be perfect sell candidates, particularly if you’re not confident of a turnaround. By selling your losers, you can use your losses to balance out gains on appreciated securities you’ve sold. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Any losses that you can’t deduct for 2018 can be carried over for deduction in future years, subject to the same limits.
Don’t make taxes your only reason for selling an investment. Many different factors should go into the decision to sell securities, including how the sale of a specific investment would affect your overall portfolio.
Curb Surtax Exposure
The 3.8% surtax on net investment income is a relatively new wrinkle for higher income taxpayers. The surtax comes into play when an individual filer’s modified adjusted gross income (AGI) is more than $200,000 ($250,000 on a joint return or $125,000 if married filing separately). The surtax applies to the lesser of net investment income or the amount by which modified AGI exceeds the threshold. For purposes of the surtax, net investment income includes taxable interest, dividends, annuities, royalties, rents, net capital gain, and income from passive trade or business activities. The surtax doesn’t apply to municipal bond interest or distributions from tax-deferred retirement plans.
A number of planning moves are available that may help reduce your exposure to the surtax. These include:
- Maximizing contributions to your employer’s qualified retirement plan. For 2018, you can contribute up to $18,500, plus an additional catch-up amount of $6,000 if you’re age 50 or older and your plan allows. Pretax contributions to a tax-qualified plan reduce your taxable income.
- Contributing to a traditional individual retirement account (IRA). Contributions are tax deductible if neither you nor your spouse actively participates in an employer-sponsored retirement plan. For 2018, the contribution limit is $5,500 ($6,500 with catch-up contribution).
- Investing in tax-free municipal bonds. Be cautious, however, about investing in private activity municipal bonds, which can increase your exposure to the alternative minimum tax (AMT).
- Deferring capital gains through the use of installment sales. The installment method lets you defer taxes on the sale of certain property by recognizing profit over more than one tax year.
Some strategies may not be appropriate for your situation. Check with your tax advisor.
From income tax preparation for individuals to complex corporate taxes for businesses, you’ll like working with us because we make filing taxes easy. Just send us your paperwork, receipts, and prior tax returns and Matthew J. Rice, CPA will take care of everything. Call 704-609-1119 or request a free consultation online.