WITH YEAR-END statements, W-2s and 1099 forms arriving, it’s time to look for ways to trim capital gains tax liability, especially given the many changes that kicked in for 2018 due to the tax law passed just over a year ago.
As always, the end of the tax year – Dec. 31 – closed the door on many opportunities to save on your tax bill, like selling losing investments to book capital gains tax losses. But experts say a few tax tips are still possible for investors, mainly by contributing to retirement accounts.
“The year is over and, for the most part, the time has passed to make tax-smart moves for 2018,” says Steven J. Weil, president and tax manager of RMS Accounting in Fort Lauderdale, Florida. “The things you can still do include fully funding an IRA, if you qualify, maximizing contributions to a pension plan, and being sure you don’t miss out on any of the changes found in the new tax law that could benefit you.”
The biggest change for 2018 was a near doubling of the standard deduction to taxable income taken by people who do not itemize deductions. For 2018, it is $12,000 for single filers, up from $6,360 in 2017, and $24,000 for couples filing a joint return, up from $12,700.
Also, the individual tax rates for ordinary income were cut. For couples filing a joint return, for example, income from $77,401 to $165,000 will now be taxed at a 22 percent marginal rate. Most those taxpayers were in the 28 percent, 33 percent and 35 percent tax brackets the year before. (Income ranges, as well as rates, changed for each tax bracket.)
Dividends and long-term capital gains continue to be taxed at a maximum of 15 percent for most investors.
The first step for many investors is to decide whether to take the standard deduction or to itemize. Whether you use an online tax-preparation program, a downloaded one or old-fashioned paper forms, you’ll need to list your deductions to determine if itemizing will pay.
Most basic tax rules and strategies remained unchanged with the 2017 law. Investment losses are still subtracted from gains to reduce long- and short-term capital gains, for instance, though sales had to be by Dec. 31.
The most significant last-minute move for cutting the tax bill survived. That is to maximize contributions to individual retirement accounts, traditional or Roth, before filing, says, Nicole N. Middendorf, CEO at Prosperwell, a wealth advisor in Plymouth, Minnesota. Contributions for 2018 must be made by this April 15, even if you get an extension to file your return. The account can be opened up to the filing deadline.
As a general rule, investors are smart to make traditional and Roth IRA contributions as early as possible to provide more time for investment growth, says Jai Kumar, marketing manager at Rapid Filing Services, a tax filing site based in New York City. This tax tip may be especially smart this year, as stocks are well below their highs, some experts note.
“You can contribute to the IRA through Tax Day and still get benefit of the deduction in 2018, and the sooner you start, the better, actually, instead of doing throughout the year,” Kumar says. “It is recommended to max it out as soon as possible.”
These contributions reduce taxable income and are available regardless of whether the taxpayer itemizes or takes the standard deduction. But not everyone can deduct up to the maximum contribution.
The maximum IRA contribution for 2018 is $5,500, of $6,500 for people 50 and older. That applies to all IRAs taken together, including a mix of traditional and Roth accounts. There is no tax deduction for a Roth IRA contribution, though it still may be worth doing because Roth withdrawals are tax free while money taken from a traditional IRA is taxed as income.
Rules for tax deductions to traditional IRAs vary with income and circumstances. If the individual, or neither spouse filing jointly, has no retirement plan at work, the entire contribution is subtracted from income, reducing the income tax. A couple over 50 contributing $13,000, could thus save $2,860 in income tax, assuming a 22 percent tax bracket. A workplace retirement plan includes a 401(k) or similar plan as well as a traditional pension.
It gets trickier if there is a workplace plan. Single filers with modified adjusted gross income of $63,000 or less can deduct a full contribution. For joint filers, the figure is $101,000. Above those levels, deductions phase out until they reach zero for singles reporting $73,000 and joint filers $121,000.
Investors who are self-employed or have moonlighting business have an additional opportunity, Middendorf says.
“If you have a business on the side, use the SEP IRA for additional deductions,” she says. “You can put away up to 25 percent of your net income.”
The maximum SEP contribution for 2018 is $55,000, so long as it is no more than 25 percent of net income (or 20 percent for self-employed people.) Again, the deadline is April 15, or up to Oct. 15 if you file for an extension.
Self-employed taxpayers with no employees other than a spouse can contribute to an individual or solo 401(k) up to the filing deadline, so long as the account was set up by Dec. 31 (IRAs and SEPs can be set up after the 1st of the year).
You can put in $18,500, or $24,500 if over 50, as an “employee.” In addition, as the “employer” you can contribute up to 20 percent of your net income from self-employment. Both types of contributions are removed from your taxable income, so the potential saving from this tax tip can be quite large.
For most, those retirement account contributions are the last chance to save significantly on your tax bill for 2018. Experts urge investors to get a jump on 2019 taxes by making the moves that must be done by the end of the year. That includes tax-loss sales and maximizing 401(k) retirement account contributions as well as old standards like deferring a bonus to the next year or taking deductible expenses as early as possible.