The 2018 tax preparation season is upon us, meaning that it is also time to review the new tax laws and start developing tax strategies for taking advantage of them in 2019. Below are eight ideas that can be implemented immediately to help increase tax savings next year.
Health Savings Account:
In many cases, a Health Savings Account, or HSA, can be a wonderful tax-saving option. Because it is funded with pre-tax dollars, one can take a deduction on the amount being deposited. If used for qualifying medical expenses, the funds are then distributed free of federal or state taxes. In other words, the money goes into the account as a tax deduction, it grows tax-deferred while in the account, and is then withdrawn tax-free if used for qualified medical expenses. There must be a high-deductible plan in place to take advantage of this scenario, but most group plans do offer one as an option. Another advantage to these plans is that there is no requirement to reimburse oneself immediately, so the account can continue to grow and later be used for Medicare Part B premiums, prescription drugs, deductibles, co-pays, and even long-term care premiums. Individuals with a family high-deductible health plan can contribute up to $7,000 in an HSA, with a $1000 catch-up contribution for those 55+ years old and over.
Roth IRA Conversions:
When using this strategy, assets from a traditional IRA are converted to a Roth IRA to accumulate tax-free funds for retirement or wealth transfer to beneficiaries. There are no restrictions on how much can be converted or who can convert them. Taxes are paid on the dollars that are converted, but they are paid at the lower, current rate. It should be kept in mind that the effectiveness of this particular option may change in the future since it is not known what the tax rates will be.
The Backdoor Roth IRA Contribution:
A backdoor Roth IRA is a traditional IRA that is funded using a non-deductible contribution and then converted to a Roth IRA. Individuals who are limited in doing annual Roth IRA contributions due to their high-income level find this to be a very useful strategy. There is no tax on the conversion because it is made up of after-tax dollars, but one must be careful not to allow other IRA assets to be pulled into the tax calculation. This strategy works best if an individual has no other IRA assets, and it is a good way to get funds flowing into a Roth IRA when they would not otherwise qualify.
The Mega Roth 401(k):
Employees can contribute their payroll deferrals on a Roth basis if their employer has adopted Roth amendments to their 401(k) plans, which many have. This means that an employee’s contributions – and their resulting growth – will be withdrawn tax-free. Since many plans now allow employees to contribute over the payroll deferral limits, the tax savings can be significant. Plus, employees can contribute up to $56,000 between payroll deferrals and after-tax contributions, with an increase to $62,000 if they are age 50 or older. It should be noted that the after-tax contributions should be converted to a Roth also, so that the growth will also come out tax-free. This can be done every year, either by an in-service rollover to a Roth IRA (if the plan allows) or through in-plan conversions.
The QCD, or Qualified Charitable Distribution:
If an individual is required to take minimum distributions from an IRA, they can avoid paying tax on distributions by making charitable donations directly from the account. The donations will count as part of the distribution requirement and are essentially tax-free. Due to the new tax laws, many individuals will not see a benefit from deducting their charitable contributions on Schedule A. Rather, with a QCD, the same contributions that an individual would normally make can be done using funds that they would have to withdraw anyway. A maximum of $100,000 can be distributed under the QCD.
The Donor Advised Fund:
An individual can “stack” several years’ worth of donations into one by contributing to a Donor Advised Fund. It will then be possible to potentially deduct the excess over the standard deduction for that year. Contributions and their earnings can then be distributed out over a specific period decided by the individual and their charitable needs.
The Solo Roth 401(k):
Small business owners with no other employees can contribute up to $25,000 per year into a solo Roth 401(k) if age 50 or older, or $19,000 per year if under age 50. Solo IRAs are easy to set up and do not block an individual from doing a traditional IRA or Roth IRA contribution if they are otherwise qualified.
Qualified Business Income Deduction:
An individual who is self-employed, an S corporation, or a LLC can deduct up to 20 percent of their qualified business income under the new tax laws. Income can be deferred, or expenses accelerated, if an individual is subject to the income limitation on this deduction. Income sources that do not qualify for the deduction can be separated into a different LLC or S corporation so the business lines that do qualify for the deduction will get it.
Conclusion: The new tax laws have created many changes and many opportunities. The concepts above provide an excellent starting point for an individual to start taking advantage of the new laws. A qualified, holistic professional can help develop a customized plan for an individual’s specific circumstances. Look for a holistic financial advisor near you who can help you with your tax preparation and file with confidence!
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