The MBA Year-End 2018 Tax Checklist

With school back in session and tax year 2018 quickly coming to a close, it’s that time again for MBAs to go through their year-end tax checklist.

Business school is unique in that most students worked full-time for several years before returning to graduate school, during which they will have a short gap period of income. Typically, a MBA degree covers three tax years: the 1st year when students work for half of year before enrolling, the 2nd year when their only income is an internship, and the 3rd year when they work full-time after graduating in the summer.

This gap in income opens up some tax planning opportunities, listed in the below checklist. Before acting on any of these suggestions though, make sure to consult with a Visor tax advisor. You need to apply your personal situation, such as a spouse’s wages or other income, before making any financial decisions.

1. Roth conversion of a Traditional 401(k) or IRA

Transferring assets from a pre-tax Traditional 401(k) or IRA to a Roth IRA account actually results in additional taxable income this year. The trade-off, though, is that investments in a Roth account do not get taxed again, including when you withdraw the funds during retirement. Traditional retirement accounts, on the other hand, have their distributions included as taxable income during retirement.

If subject to a low tax rate today, recognizing income now to reduce taxable income in retirement is a very beneficial tax planning move, making the Roth conversion very attractive. It can work well for MBAs who contributed to a pre-tax Traditional 401(k) in their job pre-business school.

This strategy of course requires having other cash available to pay the added tax bill that comes with the conversion. And, the key to this strategy is determining the optimal amount of assets to convert to a Roth account based on your specific marginal tax rates.

2. Roth IRA Contributions

Along the same lines as the Roth conversion described above, contributing directly to a Roth IRA might also be a strategy worth considering. The Roth IRA is a great vehicle since funds grow tax-free and are available to be withdrawn in retirement without incurring any taxes.

Of course, contributions to a Roth IRA are not tax deductible this year, but given you are facing a low income tax bracket this year anyway, that benefit isn’t worth much. That’s why it could be a great time to put funds into a Roth.

This strategy can be difficult for cash-strapped MBAs, but it may even be worth considering taking additional loans to up to the maximum allowable contribution of $5,500, if you believe the invested tax-free funds will outperform the student loan interest rate over the long-term.

Note that you are only eligible to contribute to an IRA if you earned income in that year. For example, to make the maximum IRA contribution of $5,500, you must have earned at least $5,500.

3. Tax-Free Capital Gains

Last but certainly not least as this one is our favorite tax planning strategy for MBA students.

Long-term capital gains (which applies to investments held longer than one year) face their own special tax brackets. Depending on your income, the long-term capital gains tax rate for federal taxes can be either 0%, 15%, or 20%. That’s right – there’s a 0% bracket!

The 0% tax bracket in 2018 applies to taxable income up to $37,950 for singles and $75,900 for married couples. Taxable income is defined as all income (including the capital gains as well as a Roth conversion if did #1 above) minus any deductions.

Quick example: Mary is a single MBA student who earned $20,000 during a summer internship. This year, the standard deduction is $12,000 for singles and $24,000 for married filers. So, after subtracting her $12,000 standard deduction, her taxable income is currently just $8,000. Mary could recognize up to $31,950 of capital gains without paying another cent in federal capital gains taxes.

This strategy can work really well for current 2nd year students with investment portfolios. Even if you don’t need the cash to pay tuition, you can always repurchase the stock right away to reset your cost basis.

Key Takeaways

You learn a lot at business school, but unfortunately they don’t always teach you personal tax saving strategies. School is expensive enough, so make sure you’re optimizing your taxes the best you can.

Need help? Get in touch with a Visor tax advisor.

Anything the article didn’t address? Leave a comment below and we’ll reply ASAP!


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