Financial Ground: 3 Timely Tax-Saving Tips
With the tax filing deadline looming, this seemed like an excellent entree for this new, monthly column. One or more of the following strategies may help lower the amount you owe on your taxes this filing season.
Tip #1: Contribute to a Traditional IRA. If you had access to a retirement plan through your employer and used it- GREAT JOB! It is pretty standard to have a match on your contributions from your employer, which is an instant guaranteed return. If you did this, you could still contribute to a traditional IRA, but you start to lose the tax deduction if your adjusted gross income is more than $101,000 for married couples or $63,000 for single filers for the 2018 tax year. If one spouse has access to a plan and the other does not, then the phase-out starts at $189,000. The best place to see the rules, if you so care to, is via IRS Publication 590-A (available at www.irs.gov). They lay all the rules out, and they do a decent job of making it understandable. Better yet, if you’re engaging the services of a financial advisor or qualified tax professional you can ask them. You have until April 15th to make a contribution to a traditional IRA for the 2018 tax year, but I recommend not waiting until then. Most mutual fund companies will accept an April 15th postmark on the application and contribution check, but there often still exists a deadline. I am aware of at least one instance where the mail arrived at the fund company two weeks after mailing, and they refused to honor it. If you're right up against that deadline, you might just go to your local bank or federal credit union and open a savings account IRA. You can easily transfer it, tax-free, to another investment of your choice later. This secures the tax savings. You'll likely get dinged for one annual custodial fee, but it is probably worth it. The contribution limit for one individual to all of their IRAs- Traditional or Roth, is $5,500 in total for 2018. If you’re 50 or older the limit increases to $6,500. Be sure to write or otherwise denote on the application and your check the tax year that you’re making the contribution for.
Tip #2: Let’s say you appreciate that Traditional IRA tax-deductible contribution, but it could stand to be more. You’re still in luck, possibly. Simplified Employer Pension plans, SEPs for short, can save the day. This only employer-sponsored plan allows for prior year contributions by your tax filing date-plus extensions. Now, you would need to be self-employed to take advantage of this, but you could potentially defer taxes on up to 20% of your income. SEPs are often touted for being able to defer up to 25% of your income, but if you're self-employed, a calculation must be performed that generally brings the limit down. If you have employees other than yourself it is important to note that the percentage of annual income that you contribute for yourself is the same percentage you provide for them of their yearly wages. There are some exceptions to including all employees, like if they are covered by another retirement plan. Generally, if someone has worked for you for 3 of the last 5 years, is 21 years of age, and has earned at least $600 they have to be included.
Tip #3: Contribute to a Health Savings Account (HSA). If you have a high deductible health plan that is HSA qualified you can make a tax-deductible contribution- in addition to your other retirement plan contributions. Not all states allow the contributions to be deductible for state taxes, but Montana does! These are TRIPLE tax-advantaged; contributions are tax-deductible, they grow tax-deferred, and the distributions used for qualified medical expenses for the individuals covered by the plan are tax-free. Covered expenses include prescription medications, visits to the dentist, optometrist, contact lenses, et cetera- even your health club membership if your doctor prescribes it! Those contributions, if not spent, can be invested and grow. Many mutual fund companies and some banks offer HSAs. Alternatively, companies exist online specifically to administer HSAs. The contribution limit for a family plan in 2018 is $6,900 and $3,450 for single filers, with an April 15th contribution deadline. Folks age 55+ can add $1,000 to those limits. Please be sure you have an HSA qualified health plan before opening an account, or those tax savings would not be allowed.
These tips are meant as a starting point if they seem helpful to your situation. There are rules regarding each one that we can’t fully elaborate on in this space. Please thoroughly research or gain the advice of a qualified professional before implementing any of them.
May one of these tips put cash back in your pocket!
Michael Thomas owns and operates Thomas Capital Management, LLC in Hamilton, MT. He has 22 years of industry experience. When not at the office he greatly enjoys spending time with his family, making progress on endless projects on his homestead, and tending to his chickens and ducks.
Thomas Capital Management, LLC, 274 Old Corvallis Road, Suite K, Hamilton, MT 59840. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Thomas Capital Management, LLC are not affiliated.