7 Tax Reform Opportunities and How to Spot Them, Ep #72

https://www.amazon.com/Birthday-Card-48-Pack-Envelopes-Included/dp/B01MY2WNJO/ref=sr_1_17?ie=UTF8&qid=1542641626&sr=8-17&keywords=box+of+birthday+cardsAs the holidays near, visions of new tax savings dance in our heads.  But knowing how to spot them is what really matters. With all the new tax law changes, Will Holt joins us again to guide you through seven tax opportunities to take advantage of before year-end. Some of these tips can save you thousands of dollars, so listen in to see how you they may benefit your personal situation.

7 Tax Opportunities to Take Advantage Of

1. Which Direction are you Tax Harvesting? (Loss or Gain) – This hasn’t changed with the new tax law, but depending on your tax bracket, the percentage of tax you could pay has. If you’re facing a significant amount of capital gains or expect large capital gain distributions, the rough October performance could be a good opportunity for tax loss harvesting. This allows you to offset some of those gains and even go a step further, by using $3,000 of net losses against your income. It may seem counterintuitive to sell at a loss, but it allows you to offset higher potential taxes. Conversely, if you are in the new 12% federal tax bracket and lower, realizing more gains could be an opportunity instead, as these could be realized at 0%. But knowing your tax rate and all expected income is required. Discuss with a professional to know for sure.

2. Save more Pre-tax Retirement Contributions – Understanding how close you are to the max contributions of your retirement accounts, could present extra tax-advantaged savings at the end of the year. Maxing your 401K contribution is the first place to check. If you get a big year-end bonus, this could be a good trigger. Don’t forget your HSA, as this account provides a triple threat of tax savings (tax deduction, tax deferral, tax-free withdrawals).

3. Convert a Roth IRA? – With the new lower tax rates, this could be an nice opportunity to lower the inevitable tax you were going to pay on your IRA or 401(k) withdrawals. Additionally, you will be taking money out of a tax-deferred account and moving it into a tax-free account. One of the biggest benefactors of these moves, could be early retirees with large taxable accounts, because of the ability to pay the tax due on the conversion. But you’ll need to be more precise going forward, as the opportunity to recharacterize if you overshoot, has been eliminated.

4. Bunching Charitable Contributions – The new tax law has increased the standard deduction for individuals to $12,000 and for married couples from $12,000 to $24,000. This means around 90% of people will now be taking the standard deduction according to the Tax Policy Center. If you forecast your itemized deductions could be higher than the standard amount, consider bunching your charitable contributions into 2-year bundles. One way to do that is by using a bunching tool called a donor-advised fund.  The donor-advised fund allows for more flexibility in taking the deduction now, but still allowing for spreading contributions throughout the year. For more information about donor-advised funds, refer to episode 59 for more details.

5. Look at a Qualified Charitable Distribution Early in the Year – One of the opportunities, that hasn’t changed but is getting more attention, is the QCD or qualified charitable distribution. To enjoy this opportunity you are required to be age 70.5 and older as you can designate a portion of your required annual distribution directly to a charity. This takes some precision and should be targeted for earlier in the year when the RMD still needs to be taken as it must come directly out of an IRA and go directly to the charity of your choice.

6. 20% Deduction for Qualified Business Income – If you are a small business owner or entrepreneur the qualified business income deduction will be of interest. What’s come to be called the QBI deduction, or 199A deduction, is used for any business that is not a C corporation. If you have self-employed income or are an S Corporation, you can receive a deduction of 20% on your profit. However, there are income limitations. After you listen to this tip you’ll want to sit down with your tax professional and plan your taxes. We wrote a more detailed article on potential savings with QBI here.

7. Watch the Tax Torpedos – To truly understand your own tax planning, you have to watch specific income thresholds. We refer to these as tax torpedos. For example, if receiving a premium tax credit for health insurance, you could lose your entire subsidy if you surpass the income limitations by even $1. These are set according to the amount of family members (up to 4). A great example of why tax planning matters throughout the year as well. We discuss other important income thresholds dealing with the medicare premium surcharges, child tax credit cutoffs, and roth IRA limits.

As you prepare for the holiday season, make sure you take a second look at your tax planning. By watching out for these financial opportunities, you could end up saving yourself thousands of dollars in taxes. It’s important to have a multi-year tax strategy and always consider the big picture, not just what is happening now.  Being financially smart means considering all aspects of your financial life.  This time of  year, that begins with looking for ways take advantage of new tax laws for your personal situation.

Outline of This Episode

  • [2:47] Tax loss harvesting
  • [6:51] Retirement accounts tax savings
  • [9:00] The Roth conversion
  • [12:09] The new tax law increased the standard deduction
  • [15:36] Qualified charitable distribution
  • [19:43] The qualified business income deduction
  • [22:37] Specific thresholds to look out for

Resources & People Mentioned

Connect with Will Holt

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