There are very few things that can be done after the year is over to reduce your taxes. One of the only things people can do is contribute to an IRA by April 15th for the prior tax year, which sometimes can be enough. I helped one of my clients avoid a $7,115 healthcare premium repayment penalty by having him and his wife put $5,756 into an IRA account, but I had 2 other clients who couldn’t contribute enough to avoid that same penalty and were left with the bill.
Here are a few ways to save money on taxes if you act before year-end.
Avoiding the advance premium repayment penalty tax – $5-10k
If you’re paying for your own health insurance plan through healthcare.gov and getting a 1095-A for this year, look closely. If your total gross income from all sources is going to be more than $60,000 for MFJ or $40,000 if you’re filing single, you might get this penalty tax. I would highly recommend talking to a tax advisor to have them run a simulation in tax software for you. There are so many moving parts to keep track of, depending on your types of income, age, etc. The software is the best way to find out how things are going to work for you. If you’re going to get hit with this one, you might be able to structure things to avoid it.
Common strategies are increasing contributions to 401k, 403b, IRA, HSA, and paying student loan interest. With the exception of the IRA, the rest have to be done before year-end. If you have schedule C income, increasing expenses before year-end by stocking up on supplies, equipment, or other deductions could be enough to help you. To find out just how much you need to contribute or pay to miss this tax could be found out from your tax planning session.
Avoiding the NIIT tax (3.8% net investment interest tax)
If your modified adjusted gross income (MAGI), which is usually higher than your AGI ends up being over $250k for MFJ or $125k for single filers, you will get hit with an additional 3.8% tax on the following things (gain from sale of a rental property, taxable interest, ordinary dividends, annuities, other passive income).
Example: A couple filing jointly receives $200k in W2 wages and sold a rental property for a $100k gain that year. Their MAGI is $300k. They would pay an extra 3.8% tax multipled by the lesser of $300k-$250k = $50k and the $100k capital gain itself. In this example, it would be an extra $1,900.
Common strategies to avoid this would include decreasing your MAGI (explained in advance premium point above), turning your passive income into active income, if possible, or to rack up some investment expenses. Another not as common option includes gifting the property to a minor (child) or student under 24 yrs old (child) and having them sell the property. They’ll still pay the capital gains at your rate, but won’t have to pay the NIIT. If you have schedule C income, there are many more options, but they need to be done before year-end.
Avoiding Capital Gains Tax
1031 exchange to defer the tax to another year. If you’re considering selling a property, there’s always the infamous 1031 exchange. As long as you never touch the money and it’s transferred directly into a 1031 fund and to the replacement property, you can defer the tax. The paperwork is minimal and usually costs about $400-800. Usually they just need a copy of the sale contract and contact info for the buyer’s escrow agent. Most can do it 1-2 days before you close on the property without too much trouble.
Capital losses from other passive income will also reduce your capital gains, so if you had a losing investment you were planning to sell, selling it before 12/31 would offset that capital gain and save you some taxes. For example, if you’re going to pay 15% capital gains to the feds + 5% state tax, recognizing a $5,000 capital loss could save you $1,000 in taxes this year.
Avoiding the higher bracket
If 2019 taxable income is going to be over the $78,950 for joint filers & $39,475 for single filers, the federal rate goes up 10% on that income. For example, if a joint filer ended up with $88,950 taxable income, following a strategy to reduce that number by $10k will not only save them the federal + state taxes, but also an extra $1k of higher bracket tax on that income. Now is a great time of year to talk to a tax advisor, so you have time to consider your options.