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Tax Filing Preparation

9 Tax Planning Moves to Consider Before 2018 Ends

As we approach the end of the year, keep in mind year-end financial opportunities, especially tax-smart moves that could help you keep more of what you’ve earned.

Articles by Eric Bronnenkant

By Eric Bronnenkant
Head of Tax, Betterment  |  Published: December 13, 2018

As we approach the end of the year, many people think about the holidays and year-end family gatherings. While I enjoy seeing my family and eating peanut butter sugar cookies, I also try to keep in mind all of my year end financial opportunities—especially those that could shape my taxes for 2018. While your December may be bustling with merriment, consider the numerous actions you can take to help make your experience of filing taxes a little sweeter and the amount you take home after taxes potentially a little higher.

Turn on Tax Loss Harvesting+ by Dec. 28

In 2018, stock and bond markets have seen both ups and downs. These fluctuations are part of pursuing for potential higher long-term returns. When assets fall in value, Betterment takes advantage by capturing losses that you may be able to use against gains on other investments (up to $3,000 in other income). Tax Loss Harvesting+ is a one-time decision for you and Betterment takes care of the rest. Even if you do not use all the losses currently, no worry, you can carry them forward into future years. See if TLH+ is right for you.

Make an IRA contribution

Saving in an IRA can be a powerful way to help meet your retirement goals. These tax-advantaged accounts can potentially provide a tax deduction (Traditional IRA) or tax-free withdrawals (Roth IRA). The 2018 IRA contribution deadline is April 15, 2019, but maxing out by the end of 2018 will help you start making 2019 IRA contributions right after the new year. For 2019, the IRS recently announced that contribution limits for IRAs will increase by $500, so you may want every month you have to deposit toward meeting the new limit (6,000 if you’re under age 50). Max out your 2018 IRA here.

Donate to charity—ideally, your appreciated shares

If you’re like me, you’ve come to realize giving can mean more than receiving. Charitable giving is one approach to supporting your community and our broader society; it’s also a way to optimize your taxes. We at Betterment suggest that a tax-smart way to make charitable donations is by giving away appreciated investments, rather than cash. We help you do this by automatically identifying the most appreciated long-term investments and partnering with charities you can donate to. This strategy allows you to avoid capital gains taxes and potentially deduct more on your taxes. To have deductions that count, you’d have to itemize your deductions above the standard deduction (which rose to $12,000 for individuals this year), so you may want to consider “bunching” a couple years’ worth of charitable contributions. Start a donation here.

Take your IRA’s required minimum distribution (RMD) by Dec. 28

IRS rules require that traditional IRA owners start withdrawing a certain portion of their account every year once they attain age 70.5. If the distribution is not taken by the deadline, the IRS imposes a 50% penalty (not a typo) on any shortfall. If the deadline is missed, the withdrawal still needs to be taken and the regular taxes still need to be paid. For some high income individuals, the penalty plus the taxes could exceed the required distribution. If you are not sure what your RMD is for 2018, you can review your 2017 Form 5498 or FMV statement if you had a December 31, 2017 account balance. You can find your Betterment tax statements here.

Adjust your last 401(k) contributions to max out for the year

IRAs are great savings vehicles, but your 401(k) can be an even more powerful tool in enhancing retirement security as 401(k) plans have substantially higher contribution limits. For 2018, the 401(k) contribution limit is $18,500 with a catch up contribution limit of an additional $6,000 for individuals age 50 and up. These limits apply on a combined basis for the Traditional and Roth 401(k). Consider seizing on the opportunity to maximize these contributions by increasing your 401(k) payroll percentage today. You may need to speak to your payroll department to make the change. If your company’s 401(k) is managed by Betterment, max out your 401(k) here.

Review withholding for last paycheck

Taxpayers have to meet certain withholding requirements to avoid paying a penalty for underpaying on taxes during the year. You may want to consider doing a tax projection for all of your income and withholding for 2018 before the year ends. You can check yourself using the IRS’ official withholdings calculator. If you are not expecting to meet the safe harbor requirements, you may want want to increase your withholding at your job by adjusting your W-4 election for your last paycheck.

Convert your Traditional IRA into a Roth IRA in 2018

Did you know there is no income limit for converting a traditional IRA into a Roth IRA? 2018 might be the year to do it. While it’s not the right choice for every person, you may have one of these compelling reasons to do so:

  1. Capturing the benefit of tax rates that are lower due to 2017’s tax legislation.
  2. Being in a lower bracket than normal due to retirement or low income year.
  3. Gaining the benefits of tax-free income in retirement or for a beneficiary.
  4. Capture the benefit of an unused AMT (alternative minimum tax) credit carryover.
  5. Capture the benefit of a NOL (net operating loss) carryover.
  6. The taxable portion of the conversion may be lower due to after-tax contributions made previously.

Remember, Roth conversions are permanent, so you should be certain about the decision before making a change. You can discuss the complicated choice of making a Roth conversion in a retirement planning advice package with one of our licensed professionals.

Think twice about selling a large taxable investment or making a big portfolio allocation change

The bull market for the last 10 years has left some investors with enviable gains on their investments. However, any substantial appreciation does come with significant tax risks upon a withdrawal or a significant rebalancing. Capital gains are realized and can increase your tax liability. Some investors may have losses to offset the gains while others may be forced to pay taxes currently. While Betterment’s tax-smart technology sells the most tax-efficient investments first on partial withdrawals, if you remove an entire balance, all of your gains will be taxable income. Before you pull the trigger on an investment sale, consider if you need your invested money now or if you can draw down a balance over time. Even spreading withdrawals over multiple tax years could be more advantageous in terms of taxes

Capture the benefit of 0% long-term gains tax rates

If you have an income below $38,600 (single) and $77,200 (married filing jointly) for the year, you may benefit from the 0% long term capital gains tax rate. This means that you can sell capital gains (held more than one year) for any amount less than the gap between your regular income and those limits without getting taxed by the IRS. However, you should know that using this tax advantage could impact other positive tax moves, like qualifying for the IRS’ Retirement Savings Contribution Credit (which has similarly low income limits). Also, most state taxes will still tax your long-term gains. Additional rules apply, so this move may be one to talk over with a qualified tax professional.

We’ve written this article for your information, but you should not consider it tax advice. As you consider your tax situation, you should consult a qualified tax professional.

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