Benz's Last-Minute Tips to Lower Your Tax Bill

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. As we approach Tax Day, many investors are looking for ways to reduce their tax burden. I'm here with Christine Benz--she is our director of personal finance--for some last-minute tips.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: So, a lot of deadlines for things to help your 2015 taxes have passed, but there still are a few things investors can do, the first is with IRAs. What are some options there?

Benz: That's right. So the contribution limit for 2015, for the 2015 tax year, is $5,500 for savers under age 50. It is $6,500 for people who are over age 50, and this is something you can definitely do to lower your tax bill if your income falls below the thresholds for deductibility or if you are not contributing to a retirement plan at work in which case you don't have to worry about the income thresholds.

So, for the 2015 tax year, you need to have modified adjusted gross income below $71,000 to make a traditional IRA contribution and have any part of it be tax-deductible. If you are part of a married couple filing jointly that modified adjusted gross income needs to be below $118,000.

This is not to say that the deductible IRA contribution is necessarily for everyone. There may be situations where making a Roth contribution is the better idea. But certainly if your goal is to try to lower your taxes this year for 2015, see if you can make that deductible contribution.

Glaser: So a lot of investors are probably familiar with IRA contributions. What are some other tips you think are often overlooked?

Benz: One of the big ones is that people do wait until the very last minute to rush in their contributions for the tax year prior, and it's generally not advisable to do that because you're giving up some market return, given that the market over long periods of time does tend to trend up. There is an opportunity cost there to rushing in contributions. Some research from Vanguard showed that a lot of contributions do come in at--right close to the filing deadline. The Vanguard research also showed that people, when they do make that last-minute contribution or any IRA contribution for that matter, sometimes they let the money hang out in cash rather than getting it invested. Again, there is an opportunity cost to leaving the money in cash, which is generating a close to zero percent return currently, versus getting that money invested in the market.

Another thing to keep in mind is if you have a non-earning spouse, you may be able to make a spousal IRA contribution; that, too, can be used to lower your taxes, assuming that you fall below those income thresholds.

Finally, people who are eligible for the Savers Credit, so these tend to be lower-income households, can actually double-dip on the tax benefits, so they can get that Savers Credit and then they can also deduct their IRAs on their tax returns.

Glaser: Other potentially less-known strategy is to put some money into [a health savings account], which is available for people have a high-deductible health plan. What would be some strategies with HSAs?

Benz: Well, here again your limit is your tax filing deadline. So, April 18, would be the deadline to fund an HSA. For 2015, the contribution limit was $3,350 for individuals and $6,650 for families. So, one thing we see when we look at the data on HSAs is that these accounts tend to be underutilized in general. So, people aren't even putting in enough to cover their out-of-pocket healthcare costs.

This is something that our colleagues at HelloWallet, which does a lot of research into these types of behaviors, they found that people aren't putting much into their HSAs. Not enough to cover their healthcare costs. And even folks who have their wherewithal who contribute more to their HSAs and to let that money roll over from year to year and let the money grow over time, people definitely aren't doing that; that many people even those who are funding their HSAs are using those dollars to sort of pay as they go for healthcare costs.

So, a lot of I think misconceptions about HSAs, a lot of confusion. Some people are naturally averse to HSAs, because we've seen a lot of data indicating that some of the plans are pretty high-cost. So, some of that, I think, hesitancy to contribute to HSAs may be rational, but there are ways to work around a poor HSA if that's what your company has on offer.

Glaser: Where would some of those options be?

Benz: Well, I think the best one is to think about if you are using an employer-sponsored HSA, so if the employer chose some custodian for the HSA that isn't great, maybe it's a high-cost HSA provider or maybe there are a lot of administrative fees or transaction fees, one thing you can do is think about contributing to that captive HSA, but then after a period of time transferring those funds to an HSA of your choice. So the benefit of doing that is that you would pick up the ability to make pretax contributions, so your HSA contributions would be deducted directly from your payroll, but you'd be able to get into a better HSA. I think that's a terrific strategy for people who have a lousy in-house HSA. And I would also say, if you've done your homework on this and found that your plan is larded with fees as a lot of them are, complain to whoever is working to administer the plan within your company. Tell them that you think that your plan could do better and perhaps even pre-identify a few good custodians for your HR administrator.

Glaser: Okay. And finally, what else are things that investors can do to maybe get a head start on the 2016 taxes? Are there things that they should be doing right now?

Benz: Definitely. You mentioned at the outset, Jeremy, that the deadlines for a lot of things that you might do to affect your tax return in a given year, the taxes that you owe in a given year, those tasks need to be completed by Dec. 31. So on the short list of things that investors should be considering throughout the year would be fully funding those company retirement plan contributions. The deadline there is Dec. 31, in contrast with the IRA and HSA deadlines. That would be a biggie. And then another thing to consider, assuming that we continue to have volatility in certain--certainly individual securities are constantly experiencing volatility, keep tax-loss selling on your radar if you are holding securities in a taxable account. If you have positions that are trading well below your cost basis, periodically harvesting those tax losses can be very, very powerful. Those are a couple of things that investors should have on their radars really throughout every calendar year.

Glaser: Christine, thanks for your thoughts on taxes today.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.