Taxes December 13, 2018

    While tax season may be a few months away, the end of the year is actually a great time to check on your investments. Taking a pause to review your plan now can simplify the next filing season—and potentially save you money.

    Increase your tax-deferred contributions. Directing a portion of your earnings into a 401(k) or traditional IRA is a simple way to reduce your annual taxable income. For 2018, the IRS will allow you to contribute a maximum of $18,500 in pretax dollars to a 401(k) plan ($24,500 if you're 50 or older). If your employer doesn't offer a 401(k), you can contribute $5,500 in tax-deferred money to a traditional IRA ($6,500 if you're 50 or older). Depending on your income level, you also may be eligible to contribute to a traditional IRA in addition to your 401(k).1 Meanwhile, individuals covered under a high-deductible health insurance plan can contribute up to $3,450 ($6,850 for a family) in tax-deductible income to a health savings account.

    Rather than making a lump-sum contribution to your savings at year-end, use this time to plan how to bump up your monthly contributions early in the upcoming year to help spread out the payments, lessening the impact on monthly discretionary income. Investing earlier rather than later also increases the potential for gains from investment return or compounding.

    Keep an eye on tax credit thresholds. Reducing your taxable income through tax-deferred savings can make you eligible for other tax savings, as well. For example, consider a dual-income couple with two children in college and an expected $190,000 in combined taxable income this year. That's too high to qualify for the American Opportunity Tax Credit, which could reduce their income tax by $2,500 for each student. However, if each parent contributed $15,000 to a 401(k) plan, the couple could reduce their modified adjusted gross income by $30,000, qualifying for the tax credit and netting an additional $5,000 in tax savings. Calculating your income with an eye toward tax credit thresholds gives you time to adjust your plan, if necessary, before the end of the year.

    Harvest capital losses throughout the year. Capital losses—that is, securities sold for less than you paid for them—can be used on your tax return to offset realized capital gains from other securities sold during the year and up to $3000 of ordinary income to the extent that captured losses exceed capital gains for the year, as long as the loss sale occurs in a taxable account. Harvesting losses regularly can allow you to take advantage of the time value of money by investing current tax savings for potential future growth. If this sounds too complex and time-consuming, consider using the tax-loss harvesting feature on an automated investment advisory service, such as Schwab Intelligent Portfolios®. You can learn more about tax-loss harvesting and how it works by reading this article.

    Did You Know?

    Schwab Intelligent Portfolios monitors accounts of $50,000 or more for tax-loss harvesting opportunities. To enroll in this feature, log in to your account and click on "Your Portfolio Profile."

    1. For the 2018 tax year, the IRS allows people under 50 with a modified adjusted gross income of less than $63,000 to contribute up to $5,500 in tax-deferred earnings to a traditional IRA even if they also have a workplace retirement plan. However, this benefit phases out at income levels between $63,000 and $73,000 for individuals and $101,000 to $121,000 for couples.

    Tax‐loss harvesting is available for clients with invested assets of $50,000 or more in their account. Clients must choose to activate this feature. The tax‐loss harvesting feature that is available with Schwab Intelligent Portfolios Solutions™ is subject to significant limitations which are described on the Schwab Intelligent Portfolios Solutions website and mobile application (collectively, the "Website") as well as in the Schwab Intelligent Portfolios Solutions™ disclosure brochures (the "Brochures"), and the IRS website at You should consider whether to activate the tax‐loss harvesting feature based on your particular circumstances and the potential impact tax‐loss harvesting may have on your tax situation. You should read the tax‐loss harvesting disclosures on the Website and in the Brochures before choosing the tax‐loss harvesting feature. Neither the tax‐loss harvesting strategy nor any discussion herein is intended as tax advice, and neither Charles Schwab & Co., Inc. nor its affiliates, including but not limited to Charles Schwab Investment Advisory, Inc., represents that any particular tax consequences will be obtained.


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