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- Buying or selling a home
- Paying for health care
- Selling stocks and bonds
- Investing for retirement
- Saving for education
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The choices you make at these key financial moments can make a big difference when it comes time to do your taxes
Read, 4minutes
We make big financial decisions—about investing, selling a home and even choosing a health care plan—all the time. But we don’t always ask ourselves, How will this affect my taxes? Here are five situations in which remembering to consider the tax consequences—and possibly adjusting your strategy—could save you a lot of money.
Buying or selling a home
Most people are aware of the interest deduction available to homeowners on up to $750,000 in mortgage debt. But did you know that when you sell your primary residence you could take advantage of a capital gains tax exclusion on the first $250,000—$500,000 if you’re married and file jointly—of gain?
The catch is that you and your spouse must have lived in the house for at least two of the past five years. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Still, it’s worth keeping in mind when you’re considering selling your home: With the maximum capital gains tax rate at 20 percent (plus a potential 3.8% net investment income tax), that exclusion could save you more than $100,000. (Remember to keep an eye on changes to the tax rules from year to year.)
A move to consider
Suppose you want to sell your primary residence but you’ve lived in it for only the past year. If the home has appreciated substantially, it might make sense to consider keeping it off the market and continuing to occupy it until you meet the two-year threshold.
Don’t forget
If you don’t want to wait that extra year, you can still add the cost of home improvements you make before you sell to the cost basis of the home when calculating the amount of tax owed. The higher the basis, the smaller your gain—and the less you’ll have to pay taxes on.
Paying for health care
When your employer’s enrollment period comes around every year, it’s worth checking to see if it offers a qualifying high-deductible health plan. When you enroll in a high-deductible health plan, you may be eligible to contribute to a health savings account (HSA). Your contributions to an HSA are tax deductible (or may be made by pre-tax salary deductions if allowed by your employer), and earnings and withdrawals for qualified medical expenses are federal income tax free.
A move to consider
If your HSA allows you to invest the money you contribute, its potential tax-free growth could help you pay for health care costs as you age and even cover the cost of Medicare premiums.
Don’t forget
Any contributions you make to an employer-sponsored health flexible spending account (FSA) for health care expenses can help lower your federal taxable income. Note that participating in certain types of health FSAs can impact your eligibility for HSA contributions.
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Selling stocks and bonds
There are many reasons you might want to consider selling an investment. Before you do, keep in mind there may be tax consequences when you sell investments to realize gains—but not all investment-related income is taxed at the same rate. For example, bond interest and dividends from real estate investment trusts (REITs) are often taxed as ordinary income, at rates as high as 37 percent (plus a potential 3.8% net investment income tax). And qualified dividends and profits on the sale of investments owned for more than a year are eligible for long-term capital gains rates, which are generally capped at 20 percent for most taxpayers (plus a potential 3.8% net investment income tax).
A move to consider
As a general rule, it’s better to have investments that don’t produce income, such as growth stocks, in your taxable accounts and to keep investments that generate income, such as corporate bonds and dividend-producing stocks, in tax-deferred accounts.
Don’t forget
You may be able to offset your capital gains by selling investments that have dropped in value. If your losses exceed your gains, you can generally deduct the difference on your tax return—up to $3,000 (or $1,500 if married and filing separately) a year. Lossesin excess ofthat amount can be carried forward to subsequent tax years.
It’s important to remain tax-aware, as changes in tax rates and rules could help toinfluence the financial decisions you make today.
Investing for retirement
When you get a new job and participate in your retirement plan, you may have a choice between traditional 401(k) contributions and Roth 401(k) contributions. Traditional 401(k) contributions are made on a pre-tax basis, giving you immediate savings by reducing your federal taxable income. In addition, investment income in your account is not subject to federal taxes until money is taken out at retirement, at which time it’s taxed as federal ordinary income. Roth 401(k) contributions are made on an after-tax basis, but qualified withdrawals starting at age 59½ are potentially federal income tax free.
A move to consider
Choosing one over the other depends on whether you expect to be in a higher tax bracketnow or when you retire. One strategy is to split your contributions—make sure you contribute enough as pre-tax contributions to limit your taxable income and to keep from rising into a higher tax bracket, and then put the rest in as Roth contributions.
Don’t forget
Be sure to contribute enough to your regular 401(k) to earn the maximum matching contribution from your employer—companies can match traditional and Roth 401(k) contributions but can only allocate matching contributions to a pre-tax account in your 401(k) plan.
Saving for education
Choosing to set aside money for your children’s educationin a tax-advantaged 529 college savings plan is one of the easiest financial decisions you’ll ever make.Withdrawals, including any earnings, are federal—and usually state—income tax free when used for qualified educational expenses, including college expenses, private elementary or secondary school (state tax treatment may vary). Each 529 plan has different features, investment options and expenses, so make sure you shop around for the right plan for your situation.
A move to consider
States sponsor 529 plans, and some offer state income tax deductions for contributions from state residents. However, those deductions may be limited and have recapture provisions. Other states’ plans may have better investment options and lower fees, and those could outweigh the tax advantage of choosing your own state’s plan.
Don’t forget
Grandparents can also establish and contribute to 529 plans that benefit their grandchildren. Additionally, as the federal financial aid rules have changed beginning with the 2023 to 2024 academic year to eliminate the so-called “grandparent trap”, withdrawals from a grandparent-owned 529 plan will no longer have a negative impact when filing the Free Application for Federal Student Aid (FAFSA).
Disclaimer
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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America Corporation and/or its affiliates assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. ©2024 Bank of America Corporation.
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