Even though you are just beginning to prepare to file your 2018 tax return, it is important to also be thinking about your 2019 return. The changes to the tax code that were signed into law in December 2017 will impact your 2018 return and provide better understanding of your potential 2019 tax situation. Fortunately, it is the beginning of the year, so you have plenty of time to plan for 2019.

At Financial Strategies, we believe that you absolutely should pay taxes. However, we also say that you should never pay a tax today that you can put off until tomorrow. That is, unless your tax rate is lower today than it will be in the future. It is important to understand both your current tax rate and your potential future tax rate because that impacts your investment strategy. For example, if your current tax rate is lower than your future anticipated tax rate, we might recommend a Roth conversion.

We will also want to look at ways to reduce your taxable income. If possible, max out your contributions for a 401(k) or an IRA. If you are eligible, contribute funds to an HSA or FSA account. Just remember that FSA contributions must be used for qualified expenses before the end of the year or the funds disappear. By contrast, HSA funds belong to you. As long as you participate in a High Deductible Health Plan (HDHP), you can contribute to an HSA. An HDHP is any plan with a with a deductible of at least $1,350 for an individual or $2,700 for a family with a maximum out of pocket of $6,650 for individuals and $13,300 for families.

One significant change caused by the new tax law is the increase in the standard deduction amount. The standard deduction for single taxpayers is now $12,000 vs. the previous deduction of $6,350 and Married couples filing jointly now have a standard deduction of $24,000, up from $12,700. These increases are expected to reduce the number of taxpayers who itemize, making tax planning even more important. We will review your planned deductions with you to see if you will be eligible for itemizing or if you’ll be taking the standard deduction. If your itemized deduction amount is close to the standard deduction amount, we can look at tax reduction strategies such as:

  • Your charitable giving strategies. Depending on your tax situation, you might want to consider doubling up on your giving one year, then taking the following year off. Another option is starting a donor advised fund, which will give you the benefit of the tax deduction but spread the donations to the recipient over a longer period. We can also determine if you should consider donating appreciated shares or (if you’re over the age of 70.5) taking a Qualified Chartable Distribution (QCD) in which you donate funds from IRA directly to a charity. This donation can count as part or all of your Required Minimum Distribution (RMD). The advantage to a QCD is that the amount donated is taken as an adjustment to gross income, not a deduction, so the donation reduces your tax burden whether you itemize or not. Plus, in some cases it could also reduce the amount of your Social Security that is taxable. Note that QCD’s are limited to $100,000 per year even if your RMD is less than that.
  • Investment gains or losses from the previous year. We can work with your CPA on losses that can be carried forward. If needed, we can implement strategies to make changes to your investment portfolio that will allow you to take a taxable loss on some of your holdings, which is an adjustment to gross income rather than a deduction (so you can benefit from this strategy even if you don’t itemize).

The bottom line is that you should never make a bad investment decision simply because of good tax treatment. Your overall financial strategy should consider tax reduction, but avoiding taxes should not be your main focus. All the pieces of your financial plan are related. We can work with you to balance your tax strategy with your investment strategy to drive the best possible outcome.

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