As the end of the year approaches, investment advisers are working diligently with their clients to reduce tax liabilities.
Many people are likely paying closer attention to their finances this year after quite a few were thrown off by changes made to the law via the Tax Cuts and Jobs Act. Among the surprises some taxpayers faced last year were lower refund amounts, or even owing the IRS for the first time.
There are certain steps experts recommend individuals take before the end of the year, even though the tax deadline is still months away.
Here’s are six year-end moves experts say taxpayers may want to consider:
Harvest capital losses
Some people have big investment losses that can be used to their advantage, Greg Hammer, of Hammer Financial Group, told FOX Business. This can be accomplished by harvesting capital losses.
This strategy involves selling underperforming securities and writing off capital losses to get a maximum $3,000 deduction for net losses.
Long-term capital losses on assets held for more than one year will typically be used to offset long-term capital gains. The same is true for short-term losses and gains because short-term gains are taxed at ordinary income rates.
Extra losses can be carried over into future tax years.
Justin Halverson, a partner and lead adviser at financial planning firm Great Waters Financial, told FOX Business this strategy could be particularly important this year for any non-qualified mutual funds because it is expected to be a big year for mutual fund gain distributions. So some people may want to take stock of losing investments to see if they are willing to sell anything and generate an offsetting loss.
If you do sell an asset, however, you cannot repurchase it within 30 days.
Should you 'bunch?'
The biggest conversation Halverson said he is having with his clients right now is whether it is more advantageous to itemize or claim the standard deduction.
And for some, it could be advantageous to implement a strategy known as “bunching.”
By timing payments strategically — paying your mortgage on Jan. 1 instead of Dec. 31 for example — you can maximize the number of deductions in some years while taking the standard deduction to offset in other years.
Some of the deductions that could work for a bunching strategy include medical payments, charitable contributions and mortgage payments.
Bunching works for people who are “close to the deduction level,” Hammer told FOX Business.
Both Hammer and Halverson also recommended the use of donor-advised funds to receive an automatic, immediate deduction.
The fund allows people to set aside as many years’ worth of giving at one time as they’d like in what is akin to a charitable investment account. Once the money is irrevocably put into the fund, it can be allocated at the taxpayers’ leisure over time to the charities of their choice, with the stipulation that it is put toward an IRS-qualified public charity.
Halverson and Hammer both recommended evaluating whether a Roth conversion could be a smart move.
“I don’t think there will ever be a better planning opportunity [to convert] than exists today,” Hammer said.
A Roth conversion involves taking all or parts of what you have in a traditional IRA and transferring it into a Roth IRA.
When contributing to a traditional IRA, money is taxed upon withdrawal. A Roth taxes contributions and allows for tax-free withdrawals.
That’s why Halverson said moving money into a Roth can be one of “the most strategic things you can do,” since experts believe tax rates may never be this low again.
Roth IRAs are also not subject to required minimum distributions, and traditional IRA accounts are.
It is, however, important to remember that Roth conversions are permanent, meaning you cannot put the money back into a traditional IRA. Therefore it’s best to use money that you won’t need for a while, Hammer said.
The deadline for Roth conversions for the 2019 tax year is Dec. 31.
Flexible Spending Accounts
With the end of the year approaching, people with money saved in flexible savings accounts need to use it — or lose it.
Typically, the accounts, which are tax-advantaged accounts that people can use to set aside money for certain qualified health care expenses, require individuals to use the funds within a calendar year. Any money not used is lost.
Refinance your home
Timothy Speiss, co-leader of EisnerAmpner’s Personal Wealth Advisors Group, told FOX Business that it is a good time to consider refinancing your home, while rates are low.
The exception, however, is for people who owe more than $1 million.
“You will lose your grandfathered mortgage interest deduction of up to $1 million (current with tax code changes is 750K),” Speiss said.
Check withholding amounts
Speiss, Halverson and Hammer also urged people to check their withholding amounts.
Many taxpayers were caught off guard last year when they did not receive as big of a refund as they had expected. Accurate withholding means a taxpayer would receive neither a refund nor a bill from the IRS come April. That indicates the correct amount of taxes are being taken out of each paycheck.
Stash cash in retirement accounts
While you can contribute to retirement accounts through April, Halverson recommends considering evaluating how much you are stashing away and whether you can afford to put away more.
