Matt Waters from our Denver office shares his tips for getting a head start on 2019.
Even though 2018 is drawing to a close and our focus is turning to the holidays and planning for the New Year, there is still time to save yourself some of your hard-earned money when taxes are due next April.
While it’s true there are tactics you can implement right up until the April 15 due date to lower your tax bill, you want to act now for maximum impact. Here are three ideas to get you started with tax savings planning for 2018 and into 2019:
Max Out 401(k) Retirement Accounts
In 2018, the IRS contribution limit if you are under age 50 is $18,500 ($24,500 if you are over 50). Many employers will allow you to defer up to 100 percent of your paycheck into the 401(k) plan. So, for the high-income earners that can afford to spike your contribution for a month, you still have a couple pay periods left. You will get an income reduction for each dollar that is contributed to the traditional 401(k).
If you feel it’s too late to spike the deferrals to 80 percent or 100 percent off your check, but are curious about what it “feels” like to increase your percentage just a little, then use December as a trial period so that you can begin 2019 by already saving more.
Take Advantage of Tax-Loss Harvesting
We all know the stock market goes up and the stock market goes down. For the last nine years, I suspect some of us have actually forgotten it goes down. However, as great as this bull run has been, 2018’s volatility has likely created some losses in your portfolio. Each year, you are allowed to deduct $3,000 of investment losses from your income. Here’s how it works:
You have $10,000 invested in the market and stocks fall by 30 percent, your portfolio is now worth $7,000 and you’ve incurred $3,000 in paper losses. If you sell that investment and purchase a similar asset, you’ll lock in the $3,000 loss, which you can now use to offset $3,000 in income.
If your new portfolio recovers to the original position, you’ll now have a portfolio worth $10,000 and a capital gain of $3,000 (the gain from your purchase price of $7,000 to the value of $10,000). You’ll have to pay capital gains taxes on the $3,000 but those capital gain tax rates will probably be 15 percent (as long as the investment is held for at least 12 months). Meanwhile, you’ll have saved paying taxes at ordinary income tax rates.
Save paying taxes on $3,000 at ordinary income tax rates and later pay taxes on $3,000 at capital gains tax rates? That’s a trade I’d be willing to make every time. This is known as tax-loss harvesting.
Evaluate Business Expenses
If you own your own business, the revenue/expense/income/tax game might be one of the reasons starting your own business was attractive in the first place. It’s something all business owners should track and make a priority for reducing their tax bill.
As a business owner, most of your business expenses are deductible against your business income. This holds true for many business structures, even if you are a sole proprietor. For example, say you run a painting business and had $100,000 of revenue during 2018. Hopefully, you kept track of all the paint brushes, paint, cell phone bills and miscellaneous equipment and expenses. Let’s say all that totaled $40,000. All of these expenses are likely deductible against your $100,000 of revenue. You now have $60,000 in revenue. How you turn that revenue into income is a topic for another day and will likely include a conversation with your tax professional.
If you haven’t done a good job of tracking expenses for 2018, December is a good month to install a process that sets you up to track every expense you can for 2019. With a little diligence, you’ll be surprised how much you can save on taxes as a business owner.
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Prime Capital Investment Advisors provides a client-centric, team approach to full-service financial planning, including fee-based asset management and wealth management. The firm currently has 16 locations throughout the United States, with investment advisor representatives serving clients across the nation.
Securities offered through Private Client Services, Member FINRA/SIPC. Advisory products and services offered through Prime Capital Investment Advisors, a Registered Investment Advisor. Prime Capital Investment Advisors doing business as Qualified Plan Advisors, “QPA.” Private Client Services, Qualified Plan Advisors, and Prime Capital Investment Advisors are unaffiliated entities. 6201 College Blvd., 7th Floor, Overland Park, KS 66207
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- Three Tax Savings Strategies to Consider Before Year End - December 12, 2018