3 Year-End Tax Moves To Consider
We are entering the time of year when you should look over your portfolio and decide whether to make any moves that could lower your tax bill. Here are three to consider.
1) Tax Loss Harvesting
The first is tax-loss harvesting. If you have capital gains in your portfolio, you can offset them by selling companies that are in the red. This is called tax-loss harvesting and it can lower your taxable gains. But it also means that companies that are down for the year can face increased selling pressure in December.
You can even sell a company that you still like, but be careful about the “wash sale” rule in the tax code. This rule prohibits a taxpayer from claiming a loss on the sale of a security and then buying a “substantially identical” security within 30 days of the sale.
What does “substantially identical” mean? It obviously covers selling and buying back common shares in the same company within 30 days. However, an S&P 500 index fund run by one company may be deemed by the IRS to be substantially identical to an S&P 500 index fund run by another company.
If you are considering selling investments in which you have gains, the length of time you have held the investment is important. If you sell an asset you have held for one year or less, any profit is a short-term capital gain. For 2019, you would be taxed at ordinary tax rates of 10% to 37%, depending on your total taxable income.
If you hold that investment for longer than one year, your gain will be taxed at the long-term capital gains tax rates of 0%, 15%, and 20% for most taxpayers. By paying attention to the timing of your sale, you can save yourself quite a lot on your tax bill.
2) Roth IRA Conversions
Second, if you have ever considered converting an Individual Retirement Account (IRA) into a Roth account, this could be the year to do it. The Tax Cuts and Jobs Act (TCJA) of 2017 cut tax rates to their lowest levels in years. As a result, you can convert your conventional IRA to a Roth IRA and pay lower taxes on the conversion than you would have a couple of years ago.
For a conventional IRA, the contributions can be tax protected in the year they are made. But then the withdrawals will be taxed as income. For a Roth IRA, the contributions aren’t tax protected, but the withdrawals are free of state and federal income taxes.
A married couple with $250,000 of taxable income (after adjustments) would have previously found themselves in the 33% tax bracket. Today, they are in the 24% bracket. Converting a $100,000 conventional IRA to a Roth IRA would be $9,000 cheaper for this couple than it was prior to the TCJA.
A conversion may also make sense if you expect to move to a state with a higher income tax rate after retirement. However, if you expect to move to a state with a lower income tax rate, or if you expect your tax rate to be substantially lower when you begin to make withdrawals, it will probably be better not to convert.
3) Bunch Charitable Contributions
Finally, if you still plan to make charitable contributions, consider whether there may be any impact of making the contribution in this tax year, or pushing it to the next.
For example, concentrating donations in one tax year year can increase the value of deductions beyond the standard deduction threshold, which could be then be taken in “off” years.
In closing, I would like to wish a Happy Thanksgiving to all readers. May you spend it with those you care about.
Editor’s Note: Our colleague Robert Rapier just discussed three important tax planning moves to make ahead of the filing deadline of April 15, 2020. If you’re looking for investments that are well-positioned to thrive throughout 2020 and beyond, Robert suggests that you consider utilities stocks.
Robert should know. He’s the chief investment strategist of our premium trading service, Utility Forecaster.
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