2018 Tax Season is Over: Tips to Keep in Mind for 2019


To paraphrase Benjamin Franklin, the only things certain in life are death and taxes.  While investors usually cannot forecast their demise, they can play a roll in determining how much they pay in taxes.  It has only been a few weeks since tax season ended leaving some savvy investors feeling good about how their portfolios weathered the storm, while others are reeling from writing an unexpectedly large check to Uncle Sam.

By paying attention to the “how to” of buying stocks, investors can put their money toward their portfolios, not taxes.

Investors can take lessons learned from this year and apply them to their investments now, potentially lightening their tax burden for 2019.  Below are some investment strategies of which investors should be mindful for maximum benefit and minimum tax payout.

Hold stocks for more than one year.  When a stock held for less than a year is sold, profits on the short-term gain will be calculated at the investor’s income rate, up to 39.6 percent.  Profits on the sale of stock held for more than a year are considered long-term gains, with a lower maximum tax rate of 20 percent.

Accurately calculate taxable gains on stocks sold.  When a stock is sold, taxes are only paid on the profit, not the entire sale price.  The cost of the stock, or basis, is subtracted from the sale price.  For instance, if a stock purchased for $1,000 sold for $1,400, the taxable gain on the stock is only $400.  Also, costs associated with trading the stock, such as commissions or transactions fees, are deducted from the profit.  The fees may only be $10 or $15, but, multiple fees and commissions can add up, creating a small, but, unnecessary tax burden.

Investment related expenses are tax deductible.  Financial advisor fees as well as investment advice magazine subscription fees over 2 percent of an investor’s adjusted gross income can be deducted.

Invest in tax free 529 plans for future education.  Saving money in a 529 plan for an investor’s further education or children’s college fund allows the investor’s money to grow tax free, and come out tax free if used for qualified education expenses.  Investors could realize a state income tax break on contributions as well.

Learn the rules for stock dividends.  Long-term capital gains time calculations are different for common stock and preferred stock.  Dividends paid on preferred stock covering a period of more than 366 days must have shares owned for 90 days or more during the 181 day period starting 90 days before the re-investment date.  For common stock dividend payouts, the stock must be owned for at least 60 days during the 121 day period starting 60 days before the re-investment date.  Failure to pay attention to these rules can classify the dividend sale as a short-term gain which will cost the investor extra tax dollars.

Offset stock gains with losses.  “You can’t win them all,” so the saying goes.  Even the most savvy investors have some bombs in their portfolios.  Fortunately, these bombs can lessen the tax burden of the winners.  The IRS allows taxpayers to apply up to $3,000 in stock losses toward gains.  If an investor’s stock losses exceed their gains, the losses can be applied to future year gains until the loss has been used.  Investors have to use long-term losses to offset long-term gains and short-term losses to offset short-term gains first, but, then losses of one type can be used against the other.

Stock losses can also offset ordinary income.  Up to $3,000 for those filing as “single” and $1,500 for those filing as “married – filing separately” can be used against wages or interest income.  Like with stocks, the excess losses can carryover for future years.

With tax planning in mind, beware and avoid wash sales.  The IRS has rules for “wash sales” to prevent investors from selling a stock to claim a loss and then promptly repurchasing it.  If a stock is repurchased within 30 days of its sale, the loss cannot be claimed on an investor’s taxes.  A spouse, IRA, or any other entity controlled by the investor cannot repurchase the stock within 30 days and claim the loss, either.

Contribute the maximum allowable to retirement accounts.  There are significant tax breaks to investments placed in tax deferred retirement accounts such as individual retirement accounts (IRAs) and 401ks.  In both Roth IRAs and traditional retirement accounts, the investment accumulates in a tax free account.  The entire profit realized from sales of stocks within the accounts can be reinvested without paying a portion in taxes.

Contribute to a health savings account (HSA).  By investing in a HSA for future medical costs, an investor can prepare for unexpected health related expenses and insure coverage with a high deductible health insurance plan.  Contributions to an HSA are tax deductible, accumulate tax free in the account, and are tax free when removed and used for qualified medical expenses.

Consider bonds as a tax-friendly investment.  Those in a higher tax bracket may look toward adding partially tax free bonds to their portfolios.  Municipal bond interest is exempt from federal income taxes and U.S. savings bonds are exempt from state income tax.  Bonds may not have as high a yield as corporate bonds, but, they could be a better investment once tax savings are calculated.

If necessary, make estimated tax payments.  If an investor has realized significant investment income, making quarterly estimated tax payments could help avoid interest and underpayment penalties.  Withholding for the year must be within $1,000 of taxes owed, at least 90 percent of taxes owed for the current year, or at least 100 percent of taxes owed for the previous year.

Carefully employing sound investment strategies, making maximum contributions to tax-friendly accounts, and playing by the tax rules sets the stage for an investor to have as few headaches during tax season as possible. 

That is, until the rules change.


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