Mar 8, 2019 3 min read

We are well into the 2018 tax-filing season. People who practiced proactive tax planning are paying less than they would have.

Being proactive means taking specific steps and lowering your tax bill. Most of these things had to be done before Dec. 31. There is still time for some people to do one thing that may lower 2018 taxes.

People who are not covered by a pension plan at work may be able to contribute to an Individual Retirement Account for 2018. People under age 50 can contribute all of their earned income up to $5,500 to an IRA designated as a 2018 contribution. This can be done any time until April 15.

If this person is earning $50,000 per year and makes this contribution amount, the gross income is reduced to $44,500. In the 22 percent tax bracket, this reduction would save $1,210 off your tax bill. You also would be saving more for retirement.

Remember, this contribution must be to a traditional IRA and not a Roth. This is because a Roth IRA, while it has many benefits, tax deductibility is not one of them. This means it would have no effect on 2018 income.

People over 50 could contribute an extra $1,000 up to $6,500. This is known as a catch-up provision to help older citizens to save more for retirement. This contribution level has been raised for 2019 by an extra $1,000.

With planning for 2019, you will able to find more ways to save on taxes. Many people do not understand how their asset allocation can have a major impact on their tax bill. Only your non-qualified funds affect your tax totals. This is because all qualified accounts are taxed as ordinary income rates and Roth accounts pay no tax on gains if you are over 59½ and have had the account at least five years. Some non-qualified accounts get preferred treatment.

Capital gains are when you sell an investment, such as stock, for a higher price than you paid for it. If you have owned these stocks for at least one year and one day, you get a lower tax rate on the gain. If you own it for a shorter time, you pay ordinary tax rates.

Some dividends known as qualified dividends also are taxed at the lower rate. With careful tax planning, you can help reduce your overall tax bill.

Mutual funds often are not very tax efficient because they generate a lot of the more expensive ordinary dividends, which often generate phantom capital gains. This is when you pay even if you did not sell any of your investment. That is because the fund manager sold within the fund during the year.

People who are over 59½ and retired may be able reduce their tax rate on deductions they make from qualified funds. These are investments such as 401(k), 403(b) and IRA.

If you are going to need to spend this money during retirement, plan your withdrawals by bumping the bracket. This occurs when you know that your income will never be lower than today. You take out any funds available before you would move to the next tax bracket.

Remember, other decisions that you make could affect how much tax you pay on Social Security and Medicare Part B premiums. Be a proactive tax planner and you will pay less in income taxes every year.

Gary Boatman is a Monessen-based certified financial planner. He is author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.