As the year comes to an end and you’re spending the holidays with family, tax season probably isn’t at the forefront of your mind. However, by taking a few moments to prepare, you can put yourself in a great position. While not everyone can or will receive a refund, applying the following 7 tax tips can help you avoid common mistakes and maximize your tax savings.
1. Roth Conversions
One of the best things you can do is to review your projected taxable income to determine if you can stay within one of the lower tax brackets. One of this strategy’s biggest payoffs occurs later down the road when required minimum distributions (RMD) start. Converting to a Roth now will reduce the amount of RMD since the IRA account balance will be lower by the amount of the Roth conversion.
2. 0% Capital Gains
If you are projected to be in the 12% tax bracket, it may be a good time to realize some capital gains before the end of the year. Long-term (security held at least 1 year) capital gains will not be taxed on the federal return if your taxable income is below $78,950 for Married filers and $39,475 for Single.
3. Qualified Charitable Distribution (QCD)
Taxpayers over the age of 70.5 are allowed to do a direct transfer from an IRA to a qualified charity. The transfer counts towards any required minimum distribution (capped at $100k). The QCD is not included in adjusted gross income on the tax return, meaning the contribution is effectively an above the line deduction as opposed to an itemized deduction taken on Schedule A. One thing to note: the tax reporting can be confusing because the 1099R won’t indicate that the QCD has been made. You’ll need to make sure to let your tax preparer know that you made the QCD.
4. Gifting Appreciated Stock
This is one of the true win-wins in our tax system. If the taxpayer can itemize deductions, then the gift of appreciated stock allows the taxpayer to give more than if the stock were sold first and then the proceeds were used to write a check. Selling the stock would mean realizing capital gains, which may trigger taxes due, thus leaving less to give to the charity.
5. 529 Distributions
Make sure to pay out any qualified education within the year that the expense was incurred. Expenses don’t carry over to later years for 529 reimbursement eligibility. Also, the 529 distributions should be coordinated with education credits to avoid losing any tax benefits.
6. Health Savings Account (HSA) Contributions
Many taxpayers fund HSAs through payroll deductions, where the employer often contributes as well. The total amount of HSA contributions made by you and your employer will be reported on form W2 in box 12 with a code W. If that amount is less than the maximum allowable, you still have time to make up the difference. You can make a direct (outside of payroll) contribution to the HSA before the tax return deadline on April 15th. Note: Make sure to mark 2019 as the contribution year when submitting.
7. Medicare premiums
Your 2019 Adjusted Gross Income (AGI) will determine what your Medicare premium rate will be for 2021. There are AGI tiers that determine what the future Medicare premium will be. Running a tax projection may uncover opportunities to reduce your AGI before year-end. Avoiding the next tier can save up to $1k per Medicare participant.