Year-End Tax Strategies
There’s always a lot of talk about New Year’s resolutions come January, but what if you resolved to start next year off right by ending this year strong? In the midst of holiday shopping, parties, and travel, you may want to start thinking about year-end tax planning. Why? Because the best way to minimize your taxes is to be proactive. If you wait until the last minute, you might miss out on some tax-efficient opportunities. That’s why we want to share some ideas to help you get your tax situation organized before we ring in 2020.
1. To Itemize Or Not?
With the new tax law in place, the standard deduction is now $12,200 for individuals and $24,400 for married couples filing jointly. But deciding if you’re going to itemize is a bit more complicated since the Tax Cuts and Jobs Act (TCJA) was implemented. The TCJA eliminated many standard deductions, including miscellaneous deductions for tax preparation fees, investment expenses, home office expenses (unless you’re self-employed), and unreimbursed employee business expenses.
Plus, it also capped the deduction for state and local income tax (SALT) at $10,000 and limited the home mortgage interest deduction to acquisition indebtedness up to $750,000 in mortgage loan interest (for new mortgages taken out since 2018). And if you have medical bills to throw into the mix, the floor for unreimbursed medical expenses, which was temporarily lowered to 7.5% of adjusted gross income (AGI) for tax years 2017 and 2018 only, reverted to 10% of AGI in 2019.
As a result, fewer taxpayers are able to itemize their returns these days. If you know your deductible expenses will exceed the new standard deduction amounts, then you’re good. But if you want to itemize and are coming in under the standard deduction amount, you need to take action soon. For example, you could write a check to a charity or deposit into a donor-advised fund. You can also prepay your property taxes that accrued this year but aren’t due until sometime in 2020.
2. “Bunch” Deductions
“Bunching” your deductions into the current tax year is a strategy that allows you to increase your itemized deductions. There are many ways to do this, such as using a donor-advised fund to get immediate tax benefits for charitable gifts you will make in the future. However, keep in mind that contributions to a donor-advised fund are irrevocable.
And if you have some medical procedures, treatments, or medical equipment purchases you’ve been putting off, it may make sense to accelerate these expenses into 2019 if your combined deductions will bring you over the standard deduction amount.
3. Top Up Your Retirement Accounts
Contributing the maximum allowed to tax-deferred retirement accounts, such as 401(k)s or IRAs, is one of the most effective ways to reap the tax benefits and reduce taxable income. For 2019, you can contribute up to $19,000 (or $25,000 if you’re over age 50) to your 401(k) or 403(b) and $6,000 ($7,000 for those over 50) in your IRA.
Keep in mind you only have until December 31st to maximize your 401(k), 403(b), or other employer-sponsored retirement plan contributions for the 2019 tax year. This is unlike individual retirement accounts (IRAs), where you can make 2019 contributions up until April 15, 2020.
Even if you can’t save up to the limit, deposit as much as you can before the end of the year and at least enough to receive your full employer match. Free money into a tax-deferred account is a tax-planning dream!
4. Give, Then Give Some More
If you regularly donate to charities or give of your wealth to family members, a bit of forethought can help you maximize the tax benefits while also increasing your generosity.
For giving to individuals, you can give up to $15,000 to each person in 2019 without paying gift tax or tapping your lifetime estate and gift tax exemption. Your spouse can also give $15,000 to the same person in 2019, for a total of $30,000 tax-free gift. Any unused amount is gone forever since you cannot give extra next year to make up for it. Annual gifts over the exclusion amount will trigger the filing of a gift tax return for the year, but no gift tax will be due unless your total lifetime gifts exceed $11,400,000.
Another way to give to those you love is by opening a 529 account for a child or grandchild. While 529 accounts are funded with after-tax money, it could save you on taxes in the future since the money grows tax-free and no taxes are due when you take the money out for qualified expenses. Plus, some states offer a tax deduction or credit for 529 plan contributions. (1)
When it comes to blessing organizations or worthy causes, think about contributing appreciated assets such as stocks or shares in mutual funds, provided you have owned the property for more than a year. If so, you can deduct the full value and neither you nor the charity pays tax on the appreciation. And if you are over age 70½ and have an individual retirement account (IRA), a qualified charitable distribution (QCD) may be a more beneficial way to satisfy your charitable giving goals, especially if you don’t have enough deductions to itemize.
With a QCD, the custodian of your traditional IRA makes distributions directly to a charitable organization on your behalf. The advantage here is that distributions paid directly to a charity are not taxable and will not be added to your adjusted gross income, so it will not trigger a Medicare premium surcharge and will count toward your required minimum distribution (RMD) for the year. You can direct all or a part of the RMD (up to $100,000 per tax year) to a qualified charitable organization and you will only be taxed on any remaining portion of the distribution that you received. You cannot deduct the donation.
5. Max Out Your HSA
If you have access to a health savings account (HSA) with your high-deductible health plan, you can enjoy triple-tax savings with no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. Your contributions are tax-deferred and withdrawals are tax-free for medical expenses.
Since your balances roll over from year to year, you can max out the account without worrying about using it up right away. For 2019, the contribution limit is $3,500 for an individual and $7,000 for a family, with a $1,000 catch-up bonus for those over 55.
Why Pay More In Taxes Than You Need To?
Tax planning can be a smart way to not only move closer to realizing your goals, but also in identifying gaps in your overall financial plan. Engaging in tax planning throughout the year can help lessen or shift your tax burden, free up more money to save or spend, and help you avoid mistakes that can result in penalties or paying more than your fair share.
However, you never want to make decisions based solely on the tax consequences. Tax planning is part of a comprehensive approach to planning driven by your financial and lifestyle goals. Before putting any of these strategies in place, be sure to meet with your CPA or tax professional, as well as your financial advisor to coordinate and implement the strategies that are right for you. If you want help making the right tax decisions and setting up your tax plan for success, request a complimentary consultation, give us a call at 832-585-0110, email us at firstname.lastname@example.org, or contact us online.