By Joshua Pena
Bank of America
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 income tax consequences, and possibly adjusting your strategy, may 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 income tax exclusion on the first $250,000 if you are single, or $500,000 if you’re married and file jointly, of gain? However, you and your spouse must have owned and used the house as your main home for an aggregate period of 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 current maximum capital gains tax rate at 20 percent (plus a potential 3.8% net investment income tax that may apply to any gain on the sale of a personal residence that is not otherwise excluded from gross income), that exclusion may save you more than $100,000. Remember to keep an eye on changes to the tax rules from year to year.
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.
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.
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 income tax consequences when you sell investments to realize gains—but not all investment-related income is taxed at the same rate. For example, most 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).
The One Big Beautiful Bill Act (OBBBA) permanently extends the ability for non-corporate taxpayers to deduct up to 20% of their qualified REIT dividend income. This deduction was previously set to expire at the end of 2025. And qualified dividends and profits on the sale of investments owned for more than a year may be eligible for long-term capital gains rates, which are generally capped at 20 percent (plus a potential 3.8% net investment income tax).
Saving for education
Choosing to set aside money for your children’s education in a tax-advantaged 529 education 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, and a limited amount of private elementary or secondary school expenses (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.
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).
It’s important to remain tax-aware, as changes in income tax rates and rules could help to influence the financial decisions you make today.
