With the end of 2019 rapidly approaching, the time has come for year-end tax planning! We’re going to take a look at some tax savings strategies both new and old to help you maximize your deductions and minimize your tax bill for 2019.
Capital Gains Distributions
Review your portfolio to see if you have any stocks, bonds, or mutual funds that have declined in value since their initial purchase. Selling them before year-end will create losses to offset any potential capital gains. Remember, long-term capital gains are taxed at 15% if your income is between $40,000 and $441,450, and 20% if higher. Taxpayers are eligible to claim up to $3,000 in capital losses each year, any unused losses in that year are then carried forward to the next year. Short-term capital gains are taxed at the same rate as your ordinary income. Capital gains are netted as follows:
- Short-term losses are netted against short-term gains.
- Long-term losses are netted against long-term gains.
- If either of the preceding two is a net gain while the other is a net loss, they are netted together
Pre-tax Retirement Savings
You can contribute up to $19,000 to a 401(k), 403(b), or federal Thrift Savings Plan in 2019, plus an additional $6,000 in catch-up contributions if you’re 50 or older. These contributions will reduce your take-home pay, therefore reducing your overall tax bill. As these contributions must be made through payroll deductions, the sooner this change is made, the better. It is important to note that if you are contribution to a traditional or Roth IRA for 2019, you have until the tax deadline April 15, 2020, to make those contributions for 2019. And be careful not to go over the contribution limits, as the excess contribution will be both taxable now, and once again when it is eventually withdrawn from the account.
For those who are self-employed with no employees, consider opening up a solo 401(k) plan. You can contribute up to $19,000 (plus an additional $6,000 if you’re 50 or older) to the plan, less any contributions made to an employer’s 401(k) plan for the year. You can also contribute up to 20% of your own net self-employment income to the plan, capping at $56,000 in 2019 ($62,000 if 50 or older). Similarly, a Simplified Employee Pension (SEP) account allows one to contribute 20% of net self-employment income, up to $56,000.
It is possible to convert some money from a traditional IRA to a Roth IRA, up to the top end of your income tax bracket. Taxes will be paid on the conversion, but the money will be able to grow tax-free in the Roth account after that. Converting your entire traditional IRA balance can push you into a higher tax bracket, but spreading the conversions over several years can be a great tax saving strategy.
Required Minimum Distributions (RMDs)
You must begin making required minimum distributions from your traditional IRA by April 1st of the year after the year you turn 70 ½. Failing to do so could expose you to an excise tax equaling 50% of the excess of the amount you should have withdrawn over the amount actually withdrawn. If you turned 70 ½ in 2019, you make take your first RMD anytime before April 1st, 2020. However, this doesn’t necessarily mean to wait until 2020 – if you take your 2019 RMD in 2020, you will still be required to take your 2020 RMD by the end of 2020. This will mean two IRA distributions in the same year, which will bunch your taxable income into a single year. There are situations where this may be beneficial, but it is an important consideration to make.
In 2019, you can deduct unreimbursed medical expenses that exceed 10% of your adjusted gross income. Remember, these deductions, combined with other itemized deductions, will need to exceed the now significantly higher standard deduction in order to grant you any benefit. If you will be above this threshold, you can schedule appointments and procedures that will increase the amount of your deductible expense. If it is more likely that you will be able to itemize in 2020, consider delaying these procedures and appointments by a few weeks in order to reap the full tax benefits.
Prepay Tuition, College Savings Plans
- Parents and grandparents of college students can lower their 2019 tax bill be prepaying the first quarter tuition bill – and you don’t need to itemize to take advantage of this take break. The American Opportunity Tax Credit is worth up to $2,500 for each qualifying student. This credit is limited to married couples filing jointly with modified adjusted income up to $180,000.
- For those planning to take a class next year to boost their own career, one can also benefit from the Lifetime Learning Credit. This is worth up to 20% of out-of-pocket costs for tuition, fees, and books, up to $2,000, and is not limited to undergraduate or full-time students. This credit is limited to married couples filing jointly with modified adjusted income up to $136,000.
- Contributing to a 529 college savings plan won’t affect your federal tax bill, but our clients in PA, NY (nearly anywhere but NJ or DE), can deduct at least a portion of their 529 plan contributions from state income taxes. Typically, you must contribute to your own state’s plan to receive the tax benefit, but there are exceptions. Check out https://www.savingforcollege.com/ for further details.
If you are eligible or become eligible to make HSA contributions in December, you can make a full year’s worth of deductible contributions in 2019. The maximum contribution for 2019 is $3,500 for individual coverage, and $7,000 for family coverage. There are no income limits to be eligible to contribute to an HSA, and withdrawals used for qualified medical expenses are never taxed.
If a family member has special needs, up to $15,000 can be contributed this year to an ABLE account, allowing people with qualifying disabilities to save money without interfering with government benefits. If you are a resident of one of the states that does offer a tax break for these kinds of accounts, your contribution can be deducted. Check out https://www.ablenrc.org/ for further information.
While the doubling of the standard deduction has reduced the number of taxpayers who itemize their deductions, many taxpayers can continue to itemize their deductions and benefit from deducting their charitable contributions. In addition, there are strategies that donors can consider to maximize their charitable donations while minimizing their taxes. We will briefly discuss three of these options:
- Donating appreciated securities – Instead of making cash donations, consider donating appreciated securities. Appreciated securities may include mutual funds, stocks, ETFs, or other investments that have appreciated in value. By donating securities to charitable organizations, you can eliminate the capital gains tax that would have otherwise resulted from the sale of the securities. If you do itemize their deductions, you can also receive a deduction for the fair market value of the securities as of the date the securities are transferred.
- Setting up a donor advised fund – A donor advised fund allows donors to make a charitable contribution to the fund and receive an immediate tax deduction. You can then recommend grants from the fund over time. With this strategy, donors can “lump” contributions into one year to assist them in itemizing deductions that they would otherwise not be able to achieve by donating once a year.
- Utilizing qualified charitable distributions – A qualified charitable distribution is a transfer of funds from your IRA directly to a qualified charity. These transfers count towards your required minimum distribution each year but are not reported to you as taxable income. This is a great strategy for those who no longer itemize their tax deductions, as it can not only lower your tax bill, but you can also lower your adjusted gross income and potentially receive other deductions and credits that you would not otherwise be entitled to.
Casualty Loss Deduction
Personal casualty and theft losses are now only deductible if they can be attributed to a federally declared disaster, and only to the extent that the $100 per casualty and 10% of AGI limits are met. If you were in a federally declared disaster area, you should consider setting an insurance or damage claim before the end of the year in order to maximize your casualty loss deduction for the 2019 tax year.
Making a gift of a financial asset to your children will cause them to be subject to income tax on the future earnings. For 2019, the kiddie tax will subject a child’s investment income above $2,200 to the same tax rates as trusts and estates. This tax applies to children who are under 18, and 18-year-olds if their earned income doesn’t exceed one-half of the amount of their total support. This extends to 19 to 23-year-olds if they are full-time students and their earned income doesn’t exceed one-half of the amount of their support if at least one parent is living at the end of the tax year, and the child is not filing a joint return for the tax year.
Annual Gift Exclusion
If you are interested in making a gift of a check and would like it to qualify for the $15,000 annual gift tax exclusion for 2019, there are two requirements that must be satisfied:
- The donee must deposit the check in 2019
- The check must clear in the ordinary course of business (which can happen in January)
A holiday gift of a check that isn’t deposited until after New Year’s is considered a gift in 2020, however a cashier’s check can avoid this problem.
As with all of the above strategies, we highly encourage you to discuss any strategies with your accountant before implementation. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult with your own tax, legal, or accounting advisor before engaging in any transaction.