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Consider These Tax Season Moves

Though comprehensive tax reform was passed into law late last year, most of the changes will be applied to 2018 taxes and don’t affect your 2017 tax return. For moves you can consider making to possibly lower future tax bills, see our article: Want to Keep More of Your Investment Returns? Consider These Moves.

With that in mind, here are some moves to consider before you file your return this year:

Make an IRA Contribution for 2017

It’s not too late to save for retirement and possibly generate a tax benefit for 2017 at the same time. The deadline to make a contribution to an Individual Retirement Account (IRA) for 2017 is April 17, 2018. Note the two primary types of IRAs:

(1) Traditional IRAs, to which your contributions may be tax deductible; or

(2) Roth IRAs, for potential tax-free income if certain conditions are met.Roth IRAs are funded with after-tax dollars.

The maximum contribution is the lesser of (a) your taxable compensation for 2017, or (b) $5,500 (or $6,500 if you are age 50 or older) for 2017. These limits apply to all your IRAs combined.2

If you’re self-employed or a small business owner, consider establishing and funding a Simplified Employee Pension Plan (SEP IRA). For 2017, the maximum contribution to a SEP IRA is $54,000, and the deadline to contribute is the due date of the federal income tax return for your business, generally April 17, 2018 for self-employed individuals.3

Consider a Roth IRA Conversion

While income limits may preclude some investors from making regular annual contributions to a Roth IRA, anyone can perform a Roth IRA conversion by rolling over eligible funds from a Traditional IRA or employer-sponsored retirement plan to a Roth IRA.

When you convert, you must pay taxes on the amount converted as ordinary income for the year of conversion distribution (or deemed distribution), except to the extent the amount converted is treated as a return of your after-tax contributions, if any.4

Subject to certain requirements, after-tax money in an employer-sponsored qualified retirement plan, such as a 401(k) plan may be directly converted to a Roth IRA tax-free. Before taking any action, you should speak to the administrator of the plan and your own tax advisor.

Please note that you have until Oct. 15, 2018 to recharacterize a 2017 Roth IRA conversion distribution. This allows you to reverse or undo a Roth IRA conversion and avoid paying income taxes on the taxable amount of the conversion distribution. This recharacterization option is typically utilized if the stock market value of the account’s investments declined after the conversion. The new tax law repeals this recharacterization option for conversion distributions in 2018 or later years.5

A Roth IRA conversion may not be appropriate for everyone.6 Consult with your tax and/or legal advisor regarding your individual situation.

Fund Your Health Savings Account

If you established a Health Savings Account (HSA) in 2017, you have until tax day to contribute funds to the account to use in 2018. The funds you contribute to an HSA aren’t subject to federal income tax at the time of deposit and can accumulate and roll over year-to-year if they aren’t spent. You must be enrolled in a high-deductible health plan to be eligible to contribute to an HSA. The maximum contribution to an HSA for a family of four is $6,900 for 2018.

Review Your Foreign Investments

If you have received income from international investments, you may be eligible to reclaim some or all of the foreign taxes withheld on these investments. Talk to your Financial Advisor about the tax-reclaim services available through one of our partners. 

You can typically recoup taxes from international investments paid on investments between two and seven years in arrears, depending on which jurisdiction you invested in.

These moves can help lessen your 2017 tax bill.

1 Restrictions, tax penalties and taxes may apply. For a distribution to be an income-tax-free qualified distribution, it must be made (a) on or after you reach age 59½, due to death or qualifying disability, or for a qualified first-time homebuyer purchase ($10,000 maximum), and (b) after the five tax year holding period, which begins on January 1 of the first year for which you made a regular contribution (or in which you made a conversion or rollover contribution) to any Roth IRA established for you as owner.

2 Other limitations may apply (e.g., age restrictions for traditional IRA contributions and income restrictions for Roth IRA contributions).  

3 A SEP contribution for 2017 may be made through the filing extension deadline (generally 10/15/18 for self-employed individuals), provided the client or their tax advisor has obtained an extension to file the federal income tax return for the business.

4 Determining the portion of your retirement distribution that is treated as a return of your after-tax contributions, if any, is complex, and, if the distribution is from a non-Roth IRA, you are generally required to look at all your non-Roth IRAs to make that determination (and not just the IRA from which you are taking the distribution). You should speak with your own tax advisor before taking a retirement distribution (including a conversion distribution).

5 An individual can still recharacterize a regular annual Traditional IRA contribution to a Roth IRA contribution or a regular annual Roth IRA contribution to a Traditional IRA, provided the recharacterization is done timely and complies with all the applicable requirements. 

6 There are a number of factors taxpayers should consider before a Roth conversion, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free qualified distributions in the future. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.

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