Year-End Tax Planning Strategies
Most people start thinking about their tax returns in early March, or even later. By that time, it’s often too late to take action to reduce your taxes for the current calendar year. Therefore, we recommend you looking at your tax situation before the end of the year and so you don't risk geting caught up in the holiday season.
The Tax Cuts and Jobs Act of 2017 eliminated or limited many itemized deductions, in favor of an increased standard deduction of $12,200 for single filers and $24,400 for married couples in 2019. If you are age 65 or older, you may increase your standard deduction by $1,650 if you file Single or Head-of-Household. If you are Married Filing Jointly and you or your spouse is 65 or older, you may increase your standard deduction by $1,300. If both you and your spouse are 65 or older, you may increase your standard deduction by $2,600, increasing the couple’s deduction to $27,000. Thus, you must have significant deductions, including state and local taxes (capped at $10,000 now), medical expenses, charitable contributions and mortgage interest, to make itemizing useful. Below are some ways you can increase your deductions to put you above the standard deduction, as well as ways to reduce your tax burden.
Taking Tax Losses
If you have an investment showing a loss, you may consider selling the shares to realize the loss. You can then use those losses to offset any taxable gains you have realized during the year. If your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If your taxable income will be below $39,375 for single filers or $78,750 for married filers, you might consider selling securities with gains as the Federal capital gains tax is 0% below these thresholds. By selling investments that are up, and buying them back again immediately, a taxpayer can effectively get a step-up in cost basis on current investments without incurring any Federal tax liability.
- If you've been putting off a medical procedure, dentist appointment, eye exam or other medical expense, consider paying for it before the end of the year as taxpayers who spend more than 10% of their adjusted gross income (AGI) in 2019 on medical expenses will be able to deduct those costs. Unsure which medical expenses qualify? Check out the IRS list here.
- If you will be under the $10,000 limit for state and local taxes, pay your fourth quarter estimated federal or state tax payments by year-end instead of in January.
- Make your January mortgage payment in December (which will give you extra interest to deduct).
Make Charitable Donations Count
- Instead of giving cash, use highly appreciated securities for charitable contributions. If you itemize deductions, you'll write off the current market value (if held for at least twelve months) and escape taxes on the accumulated gains.
- Consider lumping multiple years’ worth of charitable donations in one year or contribute to a Donor Advised Fund.
- If you are 70 ½ or older in the current tax year, use part or all of your IRA’s annual required minimum distribution (RMD) for charitable contributions if you aren’t going to meet the standard deduction threshold, in order to take a tax-free RMD.
Max Out Your Retirement Accounts
- In 2019, you can contribute the lower of $19,000 or whatever you earned to your 401(k) or 403(b) plan, which lowers your taxable income. If you are age 50 or older, you can contribute an additional $6,000.
- If your Adjusted Gross Income is below $103,000 as a married person filing jointly or $64,000 as a single/head of household, you can make a tax-deductible contribution of $6,000 ($7,000 if age 50 or older) to an IRA.
- If you have any Schedule C or Schedule E income, setting up and contributing to a SEP or Individual(k) can provide a significant savings opportunity, by lowering your taxable income.
Consider Converting a Traditional IRA to a Roth IRA
A conversion requires that you pay the tax due on your retirement assets now instead of in the future. Whether or not a conversion makes sense for you depends on factors including whether or not you can pay the tax due with non-retirement funds and your current income tax bracket. Also, if you are under 70 ½, have a large IRA whose RMD will increase your tax bracket by two or more brackets, and have after-tax assets to pay the taxes, then it might make sense to do several years’ worth of Roth conversions.
Use Your Gift Tax Exclusion
You can give up to $15,000 to as many people as you wish in 2019, free of gift or estate tax. If you combine gifts with a spouse, you can give up to $30,000 to an individual. You can also make unlimited payments directly to medical providers or educational institutions on behalf of others without incurring a taxable gift or dipping into your lifetime gift-tax exemption.
Fully Fund College Savings 529 Plans
You can invest up to $15,000 ($75,000 if you elect to front load five years of gifts) in 2019 to a 529 plan tax-free. Many states, including D.C., Maryland and Virginia offer state tax deductions for the contributions.
If you have any questions about whether any of these strategies would be appropriate for your situation, please reach out to us or consult your tax preparer.