Investing

Three Ways to Stay Ahead of the Tax Man in 2019

By Charles Sizemore  |  April 15, 2019

It’s Tax Day, everyone. And while it’s not exactly a holiday, it’s definitely a good excuse to pour a stiff drink.

For those of you who haven’t filed your tax return yet, consider this is a friendly reminder to either get it done today or, if that’s not realistically possible, to file an extension.

For those who have, you’ve probably noticed some changes due to President Trump’s tax reforms. Some were for the better. Others not so much…

If you run your own business as an LLC or S-Corp, your tax bill was likely a lot lower. Trump’s reform gave a nice 20% deduction on the income from pass-through entities like these.

But if you’re a homeowner in California, New York, or other expensive or high-tax areas, your taxes were likely a nightmare this year. Trump’s reforms capped the state and local tax deduction at $10,000, massively reducing what was the largest deduction for a lot of high-income Americans.

What’s done is done. There’s not much you can do to change your 2018 tax bill at this point. Now is as good a time as any to start planning for next year though. So, let’s go over a few ways to stay ahead of the tax man.

Move Your Money Around

Don’t worry. I’m not advising you to wire cash to some sunny Caribbean island or to the crown prince of Nigeria…

I’m talking about better organizing your accounts. Most people have their savings spread across tax-advantaged accounts — IRA and 401(k) — and taxable accounts, like a savings or brokerage account.

Not all investments are taxed equally. Dividends generally get preferential rates 15% to 20%. But interest is taxed at your marginal rate, which could be as high as 37%. Long-term realized capital gains are taxed at the same preferential rates as dividends, whereas short-term realized capital gains are taxed at your marginal rate like interest.

And of course, capital gains aren’t taxed at all unless you actually sell.

So, it makes sense to put the higher-taxed investments in your IRA or 401(k) accounts. This includes bonds and any strategies that involve short-term trading. Don’t waste precious space in your retirement account with an index fund you intend to hold for years that won’t generate taxable gains anyway.

And one of the best ways to lower your tax bill is to simply save more via your 401(k) or IRA. So get on that!

Reconsider Homeownership

If you currently own your home in a high-tax state like California, New York, or New Jersey, it’s probably not practical to sell it and move. You might have kids in school, and, in any event, tax laws come and go. You’d feel ridiculous if you sold a house you loved in order to skimp on taxes, only to see the tax laws change in your favor six months down the road.

Besides, most people aren’t going to notice a huge difference on their tax bill. Imagine you have $20,000 in state and local taxes, but that you can only write off $10,000. Even in the highest tax bracket, your additional taxes owed would only be about $4,000.

Hey, I despise paying taxes as much as the next guy. And I would absolutely hate seeing my tax bill jump by $4,000 per year. But that’s probably not a big enough hit to make me move.

All the same, if you’re currently renting, you might consider whether homeownership makes sense in your area under current tax laws. If you’re going to pay a fortune in property taxes — and you can no longer write them off — it’s likely better to keep renting for now.

Pay Your Charitable Contributions Out of Your IRA

This last suggestion in only applicable if you’re over 70 years old and taking the required minimum distributions (RMDs) from your IRA.

If you regularly give to a church or charity, you can instruct your IRA custodian to make your donation directly from the IRA.

This is a big deal, particularly under the new tax regime. A lot of investors who previously itemized their deductions now take the standard deduction, which means your charitable donations are “wasted” from a tax perspective.

But making the donation directly from the IRA changes the equation. Rather than reduce your tax burden with a deduction, it reduces your income from the top. RMDs paid directly to an approved charity are not taxable at all.

If this makes sense for you, call your IRA custodian to ask them for the paperwork. But make sure you keep good records. When you get your end-of-year 1099-R, your broker may not break out RMDs paid to you and those paid directly to a charity. So, you or your tax preparer will have to make that distinction on your tax return.

The more you know…

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR