Most of us only think about taxes once a year: when April starts to loom. But it’s good to get started early. With a little forethought, you could save significant money (and hassle / face palms / nagging from your accountant) by the time next year’s taxes are due.
This is especially true if — lucky you! — you’ll experience an IPO or other windfall this year.
Here are three smart ways to prepare for next year’s taxes today.
Strategize For an IPO or Other Windfall
Is your company about to go public? Pop some champagne, do the requisite amount of gloating, and then plan for a (potentially hefty) tax bill. While you’re at it, check out our Guide to Equity & IPOs.
While we strongly recommend hiring a qualified accountant to guide you, here are a few tips to get you on the right path.
Pay quarterly estimated taxes: If you anticipate owing more than $1,000 on your federal taxes in 2019, you’ll need to pay estimated taxes each quarter. Since the exact amount is difficult to predict, the “safe harbor rule” states you’ll be okay if you pay 100%–110% of the previous year’s tax liability (depending on your income). When it comes to state taxes, rules vary. In California, for example, the safe harbor rule doesn’t apply to people earning over $1 million.
Shoot for long-term capital gains: Whereas short-term capital gains are taxed at the same rate as your regular income (up to 37%), long-term capital gains are taxed at 0%, 15%, or 20%. You’ll likely want to qualify for the latter, which means you’ll need to hold your investments for 365 days after purchasing them.
In the case of IPOs and stock options, it gets more complicated. With Incentive Stock Options (ISOs), for example, you must wait at least one year and one day after exercising an option to sell it — and at least two years from the day you were granted the option — to have your profits taxed at the long-term capital gains rate.
Create a donor advised fund (DAF): Do you know you want to donate some of your money, but you’re not sure who to give it to yet? Open a DAF. You can deduct your contribution this year, then spread out your giving over time.
Invest in an “opportunity zone”: Consider rolling your gains into a fund that invests in real estate opportunity zones around the country. (Think: Reno, Riverside, The Bronx.) Not only will you delay your tax bill and diversify your portfolio — but if you hold the investment for 10 years, you won’t pay taxes on the appreciation.
Consider a Roth IRA Conversion
Tax rates are pretty low right now. So if you anticipate you’ll be in a higher bracket after retirement, you might want to convert your traditional IRA to a Roth IRA.
While you’ll pay taxes on the amount converted, you won’t pay on your withdrawals in retirement.
You choose how much of your IRA you want to convert, therefore avoiding an amount that will put you into a higher tax bracket. Since this is an irreversible decision, however, you should talk to a tax professional before pulling the trigger.
Alternatively, if your income is too high to contribute to a Roth IRA, you can look into “backdoor Roth conversions.”
Max Out Your Retirement Contributions
Dreaming of a retirement filled with endless golf games and long walks on the beach? Then you need to start saving now.
In 2019, taxpayers under 50 can contribute up to $6,000 to an IRA and $19,000 to a 401(k) in a single year. For an IRA, that averages out to $115.38 per week or $16.43 per day. That doesn’t sound too overwhelming, does it?
When you have an IRA with Wealthfront, we make it easy to max out your contributions with the tap of a button. But even if you house your IRA elsewhere, set up automatic contributions that bring you to the maximum — you’ll be glad you did.
This is the last article in our Tax Time Guide series. If you missed the first two, it’s time to catch up! Learn about the basics or the 5 things you must do before filing your taxes this year.
This blog is powered by Wealthfront Software LLC (“Wealthfront”) and has been prepared solely for informational purposes only. Nothing in this material should be construed as a solicitation or offer, or recommendation, to buy or sell any securities. This article is not intended as tax advice, and Wealthfront and its affiliates do not provide tax advice nor do they represent in any manner that the tax consequences described here will be obtained or will result in any particular tax consequences. Investors are encouraged to consult with their personal tax advisors.
Wealthfront offers Path, a software-based financial advice engine that delivers automated financial planning tools to help users achieve better outcomes. All information provided by Wealthfront’s financial planning tool is for illustrative purposes only and you should not rely on such information as the primary basis of your investment, financial, or tax planning decisions. No representations, warranties or guarantees are made as to the accuracy of any estimates or calculations provided by the financial tool or the information provided in this article.
Investment advisory services are provided by Wealthfront Advisors LLC (“Wealthfront Advisers”, the successor investment adviser to Wealthfront Inc.), an SEC-registered investment adviser, and brokerage products and services are provided by Wealthfront Brokerage LLC (formerly known as Wealthfront Brokerage Corporation), member FINRA / SIPC. Please see our Full Disclosure for important details.
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Wealthfront, Wealthfront Advisers and Wealthfront Brokerage LLC are wholly owned subsidiaries of Wealthfront Corporation.