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Mid-Year Check-up: Tax Savvy Steps to Save in 2019

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Mid-Year Check-up: Tax Savvy Steps to Save in 2019


What can you do now, just past the midway point, to get ready for 2019?

  1. Check Your Withholding

It may be time to update your W-4.  If you itemized deductions in prior years and you are used to getting a refund check, you may have an unpleasant surprise in store.  Perhaps, you calculated the number of allowances you claim based on the itemized deductions you’d be taking at the end of the year and had sufficient withholding.  But, with the $10,000 cap on itemized deductions and the $12,000 standard deduction change, you may need to reduce your allowances to have enough withholding.  The new withholding tables came out in February.  

The overhauled 2018 tax withholding tables can be viewed here – https://www.irs.gov/pub/irs-pdf/n1036.pdf.  You can also check out the IRS withholding calculator to perform a “paycheck checkup.”

Better to overwithhold and get money back than to have insufficient withholding and end up with a nasty surprise at tax time.

  1. Check Your Investment Income

Interest.  Dividends.  Capital gains.  Rental income.  Royalties.  Under the current tax code, the Net Investment Income Tax (“NIIT”) of 3.8%, often called the Medicare surtax, is applied to the lesser of net investment income or excess modified adjusted gross income above $200,000 for individuals or $250,000 for married taxpayers filing jointly.  In addition, taxpayers whose income exceeds these thresholds will owe an additional .09% of Medicare tax on top of the normal 2.9% that’s deducted from their paycheck.

Net Investment Income = Investment Income - Fees

Sec. 1411 of the Internal Revenue Code applies a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amount.

An example: Let’s say you are single and have $150,000 of wage income and $200,000 of rents, interest on loans and dividends from stocks.  That’s a MAGI of $350,000.  You will incur $5,700 of additional tax on the $150,000 by which your MAGI exceeds the $200,000 threshold.

What do you do to avoid or minimize NIIT?  If you are just at the $200,000 or $250,000 threshold for your net investment income, you could make tax-deferred contributions by maxing out your 401(k) by contributing the full maximum amount of $18,500 (plus up to $6,000 of “catch-up” contributions for those over 50), you could contribute another $5,500 to an IRA (plus $1,000 catch-up payments if you are age 50 or older)(but, be aware of phase-outs).  You can contribute to a Health Savings Account (“HSA”) if you already have a high-deductible health insurance plan.  Individuals can contribute $3,450 and families can contribute $6,900.  You can also use a Roth IRA or a variable annuity to make after-tax contributions that grow on a tax-deferred basis, shielding gains from additional tax.  Watch out for fees if you utilize this strategy.

  1. Properly Time-Out Your Capital Gains

Congratulations.  Your investments did well.  So, do you “sell” or “hold”?  Timing is everything.  Not only do you have to balance the risk and long-term prospects of the investment, but you have to factor in your income, the applicable capital gains rates, and how your portfolio is likely to look in future years. 

Schedule D nets short-term gains/losses and nets long-term gains/losses.  So, stocks that aren’t doing well can help you save a lot of money by reducing your net gains, if you realize them at the right time.

If you are married filing jointly with AGI over $425,000, the capital gains rate is 23.8% while with AGI under $250,000, the rate is 15%.  That is an 8.8% swing.

If you have a big asset like a home that you plan on selling for a big profit, you need to do some planning to offset that gain with as many capital losses as you can possibly muster.  You may want to save “loss opportunities” to offset a big hit, lowering your effective tax rate when you monetize your Return on Investment.

Category: Tax

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