As the year comes to a close, and you’re busy rushing around to get those final presents for the ones you love, here are a few quick, last-minute strategies for cutting your tax bill on April 15.

1. "Take a small example, take a tip from me. Take all your money, give it all to charity."

Unlike the Sublime song, What I Got, I’m not advocating giving all your money to charity at year-end. But, if you itemize your deductions, charitable contributions are one of the areas you can boost at year-end that may have an big impact come tax time. A caveat of this planning tool is that the Trump Tax Cuts of 2017 (in effect for the 2018 Tax Year) made big changes to the Standard Deduction and will reduce the number of Americans who will qualify to Itemize their Deductions. However, you may want to look into “Bunching” to take full advantage of the tax law changes.

What changes brought about by the Trump Tax Cuts of 2017 will impact most people?

The Trump Tax Cuts of 2017 not only increased the Standard Deduction, but also made some significant changes to Schedule A (Itemized Deductions).

They eliminated Miscellaneous 2% Deductions (think unreimbursed employee business expenses, investment management or tax preparation fees, and union dues), put a $10,000 cap on state, local, real estate and property tax deductions, limited the mortgage balance allowed to take the mortgage interest deduction and limited the deductibility of home equity loans or lines of credit unless that money was used to improve your home.

What is "Bunching"?

"Bunching" is a term to describe either pulling ahead deductions to the current year or pushing out your deductions into later years.

With the changes to Schedule A, most Americans will not qualify to Itemize given the new, higher Standard Deduction. That doesn’t mean that they can't make some adjustments to qualify every once in a while.

That’s where "Bunching" comes in.

Maybe you’re a charitably-inclined Married Filing Jointly couple. You usually give $10,000 or so each year to charities. You’ve got mortgage interest of $5,000, and state, local and property taxes totaling $8,000 each year. Those 3 pieces of Schedule A only total $23,000, so you’ll take the $24,000 Standard Deduction.

What if I told you that instead of donating $10,000 in 2018, you pull $5,000 of what you’d normally donate in 2019 into 2018? Well, your Itemized Deductions now amount to $28,000 and you’re able to itemize. In 2019, you’ll just donate the remaining $5,000 to charities and claim the $24,000 Standard Deduction. In 2020, you’ll donate a bit more again to boost your Itemized Deduction amount and so on.

Donor Advised Funds

I know what you’re saying. I really don’t want the charities to receive a big donation from me in 2018 and then get less from me in 2019. Well, there’s an account that you can utilize to take a charitable deduction and still retain control over where that money ultimately goes along with discretion over the timing of those distributions.

It’s called a Donor Advised Fund. A Donor Advised Fund allows you to donate appreciated securities (or cash), take a full deduction on your gift, and then have the ability to make “gift recommendations” to your favorite charities over time. Many also allow you to invest the account and possibly grow it for higher future gift recommendations. Since the tax deduction is taken when the securities or cash are gifted to the Donor Advised Fund, you won’t get an additional charitable deduction when a gift recommendation is fulfilled to your favorite charities. Some examples of DAFs are Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. There’s typically a minimum initial gift (most are $5,000 or more) required to establish the account and then you can make subsequent gifts of any amount.

2. Sell your losers

The markets have been choppy this fall and some investments that you hold in taxable accounts may have unrealized losses. If you have a taxable investment account, look through your account. It may be tax advantageous to sell some of your positions that are in a loss and capture the tax benefit. This is referred to as Tax Loss Harvesting and is a great strategy to utilize, just make sure you are very aware of the Wash-Sale Rules.

Capital losses are able to offset any capital gains (or capital gains distributions) you incur as well as offset up to $3,000 of ordinary income. Any losses over and above your capital gains and the $3,000 of ordinary income can be carried forward for use in future years. 

3. Open and contribute to an IRA

Luckily, you can open and contribute to an IRA up until the tax filing deadline (without extensions). For the 2019 tax year, the deadline is April 15, 2020.

As you may, or may not know, the “I” in IRA stands for “Individual”, meaning, each spouse can open and maintain a separate account. There are no “joint” IRAs.

If you’re a married couple making less than $103,000 ($64,000 if single) in 2019, each spouse could make a fully deductible contribution to a Traditional IRA of $6,000 (plus $1,000 “catch-up” if over age 50). Not only are you saving money toward your eventual retirement, but you’re also receiving a tax deduction for the amount of your contribution for the current year. Growth on your money within a Traditional IRA is tax-deferred. When you pull money out, all will be taxed as ordinary income.

Another option would be to open and fund a Roth IRA. If you’re a married couple making less than $189,000 ($120,000 if single) in 2019, each spouse can make a full contribution of $6,000 (plus $1,000 “catch-up” if over age 50) to a Roth IRA.

A Roth IRA differs from a Traditional IRA in that you do not get an upfront tax deduction for the amount in which you contribute. However, any growth on the account in the future is tax-free. This type of account is especially great for those who believe their tax rate now is lower than what they expect it to be in retirement. If nothing changes between now and 2025 when the individual aspects of the Trump Tax Cuts expire, tax rates will be higher going forward.

4. Check your Flexible Spending Accounts  

This tip isn’t going to help you reduce your taxes for this year, but it may help you from losing out on some of your savings from this year.

Healthcare Flexible Spending Accounts (HFSAs) are designed to be a way to stash money away for healthcare expenses during the year. The downside is the requirement of these accounts to be fully dispersed by the end of the year or you forfeit that money. The infamous “use it or lose it” provision.

Check your balance in your HFSA and if you still have money remaining, stock up on qualifying items prior to year end. Here’s a pretty good list from ADP of what does and does not qualify for HFSA reimbursement. Some employers allow a portion of the HFSA account to roll into the next year. Check with your employer for more details.

Focusing on a few of these tips prior to year-end may just put you in a better position come tax time.

About Chessie Advisors

Erik O. Klumpp, CFP® EA, believes that teachers, engineers, and young professionals should have access to objective, fee only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call.

Imagine a savings account that allows you to save pre-tax money (like a Traditional IRA, 401(k), or 403(b) plan), allows that money to grow tax-deferred (like all types of IRAs, 401(k)s, and 403(b) plans), and then allows that money to be withdrawn tax-free (like a Roth IRA).

It’s a tax savings trifecta!

It’s a Roth IRA on steroids, but in a legal way (not in an A-Rod sort of way).

This type of account would seemingly only exist in a fairytale, right there alongside that mythical investment that could get you 20% returns without ever losing money, and a Yeti, otherwise known as the Abominable Snowman.

I can’t say that I know how to locate a Yeti, unless you’re talking about those white high-priced performance coolers found at your local sporting goods store, and that mythical investment with no downside remains elusive, but today I’m going to introduce you to that magical account that many people are still unaware exists.

So, what is this incredible savings vehicle?

It’s called a Health Savings Account or HSA.

These accounts are nothing new, they were signed into law in 2003 and became available in 2004. However, until the past few years, these accounts really hadn’t gained widespread traction due to the requirement that they be accompanied by a High Deductible Healthcare Plan (HDHP). This is probably the biggest downside to this type of account. For 2019, High Deductible Healthcare Plans are defined as those with deductibles exceeding $1,350 for individuals and $2,700 for families (these limits rise to $1,400 for individuals and $2,800 for families for 2020).

With changes to the health insurance industry ushered in by the Affordable Care Act of 2010, the landscape for employer sponsored health insurance (where about ½ of Americans get their coverage) has shifted toward HDHPs for their employees. Many companies have eliminated HMO and PPO plans for their employees in favor of the lower cost HDHPs. This trend is likely to continue with excise taxes on high-end health care plans coming in 2022.

So, what is a Health Savings Account, and how does it benefit me?

An HSA is an account designed to contribute and grow money that can be used to pay healthcare expenses.

For 2019, the HSA allows a maximum contribution from all sources up to $7,000 for a family ($3,500 for an individual - increases to $3,550 for 2020, family limit for 2020 increases to $7,100) with an additional $1,000 allowable catch-up contribution for those over the age of 55. Some employers even help fund the HSA on behalf of an employee, kicking in $1,000 or more, which also goes toward the maximum contribution limits.

You also have the ability to make a once-in-a-lifetime rollover from an IRA to help fund your HSA. However, that rollover is limited to the maximum contribution for the HSA that year minus any contributions made by you or your employer.

Any money withdrawn from the HSA for medical expenses, at any time, is tax-free. Otherwise there is tax on distributions not used for medical expenses and an additional 20% penalty. Once you’re age 65, the 20% penalty is waived and when you take withdrawals for non-medical expenses, you simply owe tax on the money, like you would on a distribution from a Traditional IRA, 401(k) or 403(b).

I’ve got a Healthcare Flexible Spending Account, how is an HSA different?

HSAs differ from a Healthcare Flexible Spending Account in two primary ways:

1. If you leave your employer, you can keep your HSA. You own it. It doesn’t just get forfeited like the Healthcare FSA.
2. Money within the HSA not used throughout the year carries over to the next year, allowing you to fund and grow the HSA for current or future medical expenses.

How can I get a Health Savings Account?

Typically the Health Savings Account is elected during Open Enrollment (read our post 4 Ways to Conquer Open Enrollment) along with choosing a corresponding HDHP. You also elect the level of contributions you would like to have come out of your paycheck throughout the following year to fund the HSA. In some cases, you may have the ability to raise or lower your contributions into the HSA during the year. Check with your employer or HSA provider for information on this.

What are the real benefits of a Health Savings Account?

Well, the real benefit of the HSA is the tax-deferred growth and tax-free withdrawals. You have the ability to contribute every year to the account, but by using it sparingly, it will have the most long-term growth potential. Think of it as another one of your retirement accounts, but one with triple tax savings. Healthcare expenses aren’t going away in the future, they’re only likely to increase.

If you’re great at keeping records, you could save your medical expense receipts, let your money grow for a number of years, and then withdraw for the expenses you’ve already incurred at some point in the future. HSA reimbursements are not like Healthcare FSA reimbursements in that you have to be reimbursed the year you incur an expense.

Can I invest within this account?

Unlike a Healthcare FSA, a Health Savings Account isn’t just an account that holds your contributions, you have the ability to invest in mutual funds or other investments. In some cases, HSA providers require you to have more than $1,000 before you’re able to invest the money into various investments (typically mutual funds).

As with any investment, you’ll want to keep any expenses you know you’ll need within the next few years invested very conservatively or in cash. With any excess, put together a long-term portfolio based on your tolerance for risk.

When choosing investments for an HSA, you should follow similar strategies that you follow in choosing investments for your retirement portfolio. Look for lower cost investments and at a minimum, re-assess your portfolio on an annual basis.

When you’re faced with Open Enrollment, make it a point to at least check out the available High Deductible Healthcare Plan options and consider the Health Savings Account. It may be worth the look.

About Chessie Advisors

Erik O. Klumpp, CFP®, EA, founder of Chessie Advisors, LLC and Chessie Tax, LLC, believes that teachers, engineers, and young professionals should have access to objective, fee-only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call