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8 Year-End Investment Steps to Reduce Your Tax Bill

Debbie Carlson

Taxpayers should review their portfolios.

The countdown to 2019 is on, but there is still time left to conduct some portfolio management. Consider setting an appointment with a financial planner or a tax advisor to see how to reduce your taxable income in 2018, especially given the changes in the tax code from the Tax Cuts and Jobs Act. The 2018 federal tax brackets are slightly lower, with many revisions in tax deductions along with other key changes. Given the market's current volatility, it's prudent to review asset allocations to ensure that the strategy hasn't become unbalanced. Financial experts recommend these eight year-end investment steps for cutting your tax bill. But hurry, the clock on 2018 is winding down fast.

Analyze current tax bracket status.

Tamara Surratt, president and CEO of Legacy Family Office in Estero, Florida, says people need to know the new tax brackets to determine whether to defer or accelerate income or deductions. There are two steps taxpayers need to take -- tallying up their 2018 income, and if possible, estimating their 2019 income, which may be harder to do. Taxpayers who expect to get a significant income boost that pushes them into higher tax brackets may want to accelerate income this year while the rates are lower. In contrast, soon-to-be retirees may want to wait to collect additional income.

Create tax-efficient asset allocations.

Where certain securities are located in a portfolio can determine an investor's tax burden, says Ivan Hernandez, co-founder of Omnia Family Wealth in Florida. Now is a good time for investors to make sure their portfolios are tax efficient. Hernandez recommends that investors move higher risk fixed income securities like corporate bonds, international bonds and high-yield debt to tax-sheltered accounts, such as individual retirement accounts. Moving these items will allow the ordinary income that the bond produces to grow without being taxed on an annual basis. Depending on how much of the portfolio is dedicated to these securities, this can be a big tax savings. Hernandez calls this "the lower hanging fruit" of tax efficiency.

Establish and fund a one-participant 401(k).

A one-participant 401(k) is a qualified retirement plan for people who have their own business, but no full-time employees other than themselves or a spouse. Michelle Begina, a financial advisor at Snowden Lane Partners in New York, says the employee-deferral part of a solo 401(k) needs to be funded by the end of the year, although any profit-sharing can be added at the beginning of 2019. Like a standard company-owned 401(k), the deferral limit for a solo 401(k) is $18,500 for the 2018 tax year. If you're age 50 or older, you can kick in an extra $6,000.

Harvest your investment losses.

This year's market volatility has likely caused some investors to lose money. Mike Moyer, senior wealth strategist at PNC Wealth Management in Philadelphia, suggests investors sell some losing investments to recognize a capital loss, which can help offset any capital gains. Known as tax-loss harvesting, investors can offset up to $3,000 annually against ordinary income, which can be interest or wage income. Moyer says investors should work with their advisors to make thoughtful sales to ensure they still remain diversified. Additionally, he says, investors need to wait 30 days before rebuying the same security to avoid wash-sale rules, which penalize people who buy and sell the same security quickly.

Fund a health savings account.

People whose health care plans have an annual deductible of $1,350 for individuals and $2,700 for families have the option to enroll in an HSA to shelter money from taxes, says Jeff Moes, executive vice president of FineMark National Bank & Trust in Fort Myers, Florida. This is his personal favorite strategy. Individuals can contribute up to $3,450 annually and families can save up to $6,900. People ages 55 and over can contribute another $1,000 annually. Funds can grow tax free, and any withdrawals aren't taxed if used for qualified medical expenses. HSAs have securities investment options. This makes an HSA another type of sheltered investment account, similar to a 401(k) or a traditional IRA.

Create a donor-advised fund for charitable giving.

Charitable giving remains another way to reduce taxes, but only if people can itemize. With standard deductions at nearly double the 2017 rate of $12,000 for individuals and $24,000 for married couples, it's harder to surpass the new threshold. People who can afford to increase their charitable donations to get over the standard deduction level may want to open a donor-advised fund. Dan Routh, certified financial planner at Exencial Wealth Advisors in Oklahoma City, says donor-advised funds are custodial accounts that allow donors to get an immediate tax break, but donors can dole out money whenever they wish. It also avoids bunching donations to charity, he says.

Consider qualified charitable giving.

People who are age 70.5 or older need to take required minimum distributions from qualified plans like traditional IRAs. These distributions will increase retirees' adjusted gross income. However, Suratt says, retirees can give these distributions to charity instead and avoid paying the tax on it. She says donors should consider giving appreciated assets to avoid the capital gains tax. "You're leveraging the power of the gift, but it's not a taxable distribution to you, and it qualifies toward your required minimum distribution." Retirees can make up to a $100,000 tax-free distribution to charities of their choice.

Open or fund a 529 plan.

If you live where there is a state income tax, consider opening or funding a 529 plan for a child's educational expenses. Parents and grandparents can fund the accounts up to $15,000 each per child. Each state determines its rules on deductibles. Withdrawals are tax free if used for qualified educational expenses. John Vento, author of "Financial Independence (Getting to Point X): A Comprehensive Tax-Smart Wealth Management Guide," says for example, a New York City resident who contributes $10,000 to a New York state-approved 529 plan could receive an additional $1,300 state refund. "It's like getting a scholarship for your child even while they are still in diapers," he says.

Take these steps to reduce your 2018 tax bill.

To sum up, consider the following steps to reduce how much you owe in taxes:

-- Analyze current tax bracket status.

-- Create tax-efficient asset allocations.

-- Establish and fund a one-participant 401(k).

-- Harvest your investment losses.

-- Fund a health savings account.

-- Create a donor-advised fund for charitable giving.

-- Consider qualified charitable giving.

-- Open or fund a 529 plan.



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