What are some things that come to mind about the month of April? Breaking out the spring sport coat. Spending more time on the golf course. Anticipating who’ll bring home the green jacket at Augusta and of course — taxes. While the first three are far more appealing to think about, the last one is without question the most important. Tax season is here.
Before going into some detail on things you should be thinking about prior to filing your taxes in April, let’s touch on some important annual events that often transpire in March.
What Do Company Bonuses Mean For Your Taxes?
For 2019, the IRS increased the limit for salary deferrals into a 401(k) — from $275,000 to $280,000. We’ve seen a number of companies that cut off all employee contributions to 401(k)s after employees receive wages equal to or in excess of that limit — excluding any vested or granted company stock. If you’re one of those employees, it’s important to be aware of this so you can ensure your contributions are set up to max out and know how your bonus might affect your taxes.
Once you receive this lump sum of money, it’s important to be efficient in using it.
Four ways to use your bonus efficiently are:
1- Paying off any credit card debt or knocking down principal on car notes and mortgages (in that order).
2- Providing funding toward prior and current year IRA or Roth contributions, which we’ll talk about in greater depth later.
3- Funding a 529 plan if you have children or grandchildren you want to assist with education expenses. This includes providing a helping hand with college and private school tuition.
4- Replenishing your cash reserve (though this is less tax advantageous than the prior points). If your reserves are at a comfortable level, you can move the money into an after-tax individual or joint brokerage account to get invested.
The key theme here is that there are many tax-advantageous ways to use your bonus. The financial goals you have for yourself and your loved ones should ultimately dictate how you choose to use the money.
Understanding Employee Stock Grants
These can be considered as an additional bonus paid by your company, in the form of company stock rather than liquid cash. Just as the current year’s stock vests, the prior year’s stock should have a holding period of greater than a year — giving it long-term capital gain tax-preferential treatment.
While we can’t make recommendations without looking at each situation, a general rule of thumb that’s wise to follow is waiting until the stock is long term before selling. Therefore, you should consider holding onto the stock that vests each March; if you need any of the proceeds, sell the company stock that vested a year prior.
Now that we’ve covered March, let’s dig into April.
Can Prior-Year Contributions Be Made to an IRA or Roth?
Until April 15, you can make prior-year contributions to an IRA or Roth — heeding the $5,500 contribution limit, with a $1,000 catch-up provision for individuals age 50 and older. It’s worth noting that there are phaseout limits on taking a deduction for the IRA contribution and making a direct contribution to a Roth, thus we often recommend the backdoor Roth.
401(k)s for Independent Contractors and Consultants
If you’re doing consulting or some other form of independent contractor work, you will have 1099 income and can therefore open and contribute to a Solo 401(k). In fact, you have up until the tax filing deadline to make employee contributions to the plan, though the plan must have been opened by December 31 of the previous year if you plan on making those contributions.
Other Considerations That Might Affect Your Tax Situation
It’s possible you recently got a salary bump, are expecting a larger bonus, or need to re-balance your brokerage account this year. These are all important considerations that could impact your taxes in a way you haven’t come across before. Now — when you have the rules fresh on your mind — is as good a time as ever to research whether one of those variables could largely impact the way your taxes shape up in 2019.
This subject in and of itself can get incredibly complex and is one of the reasons why all of us at WJA are focused on tax-planning year-round. Please reach out to us if you’d like to know more about how we can add value to your financial life. We’d love to get to know more about you during a face-to-face meeting at our office.
Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions.