Dec 04 2019 YEAR-END TAX ADVICE: INDIVIDUAL TAX SAVING MOVES
Most of the provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018. With the first TCJA tax season behind us, we move from questioning “How does the new tax law affect me?” to “What tax planning can I do now to minimize my taxes under the new tax law?”. This Tax Alert provides individual year-end tax planning opportunities to consider before year-end.
For even more information on tax strategies, reference Sax’s 2019-2020 Tax Planning Guide here.
Individual Tax Saving Moves
- Reduce ordinary income by maxing out on contributions to tax-favored retirement accounts.
- Wage earners should consider making 401(k) contributions, or at least contributing up to the employer match. This will decrease your current year taxable income, plus the earnings grow tax-deferred.
- Consider making contributions to your HSA. Like a 401(k) plan, contributions to an HSA reduce your current year taxable income. Any unused amount is not forfeited (as is for a Flexible Spending Account) but instead grows tax-deferred.
- If you are self-employed, consider setting up a SEP-IRA by the due date of your personal tax return (including extension).
- “Bunch” deductions to maximize their benefit. If you think you will likely claim the standard deduction in 2019, consider bunching the following contributions to next year:
- Medical Expenses
- The threshold increased in 2019 from 7.5% to 10%, making it harder for taxpayers with high adjusted gross income (AGI) to deduct medical expenses. Try to bunch medical expenses in the tax year where you expect to have lower AGI. Please note: paying with a credit card is considered paying medical expenses in that year, even if the credit card bill is not paid until the following year.
- Charitable Contributions
- Consider bunching donations in alternating years by delaying a year’s worth of charitable giving from one year to the next.
- Consider gifting to a donor-advised fund. This will allow for a charitable tax deduction in the year of the gift, but the donor spreads the grant-making over many years. This strategy provides a tax deduction when the donor may be subject to a higher marginal tax rate while actual payouts from the account can be deferred until later.
- If you are 70 ½ years or older, lower your taxable income by directing your required minimum distribution (RMD) to a charity. This will allow you to exclude up to $100,000 of your RMD from taxable income. This is a good strategy for those who want to be charitable but benefit more from the standard deduction instead of itemizing.
- Medical Expenses
- If you anticipate a loss in 2019, consider a Roth IRA conversion. The ordinary income generated from the conversion can be offset by your net operating loss (NOL) allowing you to pay less or no tax on the conversion.
- Review your investment portfolio before year-end.
- Are you expecting large capital gains from your investments or a business in 2019? If so, look for investments that might be disposed of to produce capital losses to offset expected capital gains and reduce net investment income tax.
- Take advantage of the 0% capital gains tax rate. If your taxable income is too high to benefit from the 0% rate, consider gifting investments like appreciated stock or mutual fund shares to your children or grandchildren. Chances are, they will be in the 0% or 15% capital gains tax bracket if they sell the investment at least one year after the gift. Be sure to consider the “kiddie tax rules”.
- Do you have large capital loss carryovers from prior years? Try to offset these loss carryovers (whether short-term or long-term) with current year short-term capital gains (STCG) when possible since STCGs are taxed at ordinary tax rates than the preferential long-term capital gain tax rate. The difference in short-term vs. long-term gains can be as high as 17% (40.8% vs. 23.8%).
- Be sure that your tax planning strategy is in line with your overall investment strategy and consider the wash sale rule (occurs when you sell a security at a loss and then purchase that same security within 30 days).
- Paycheck Checkup
- Check your W-2 withholdings if you expect to owe in April. The IRS strongly encourages wage earners to complete a newly revised and redesigned Form W-4. Check your withholdings using the new IRS withholding estimator on IRS.gov. Doing so now will provide a more accurate result and avoid any surprises and compilations when preparing your return. It also helps avoid any underpayment penalties.
- Flexible Spending Account (FSA)
- Be sure to check your balance. You must incur qualifying expenses by December 31st to use up these funds or you will potentially lose them. Use expiring FSA funds to pay for eyeglasses, dental work or prescriptions for examples.
Wealth Transfer Strategies
- Utilize the $15,000 annual gift tax exclusion for 2019
- Consider making cash gifts to a child or grandchild with earned income which they can use to make IRA or Roth IRA contributions.
- Fund 529 plan for a child or grandchild. There is a special election that allows you to fund up to 5 years of annual exclusions in 1 year without incurring a taxable gift or GST tax.
The best way to reduce taxes is with year-end tax planning. Waiting until next year when your tax return is filed may be too late to implement many tax saving strategies. By asking the right questions now and understanding your financial goals, the Sax advisors are able to customize tax strategies around your specific business and individual needs. For any questions or issues with regards to your tax planning, lean on a tax advisor at Sax for expert guidance. Reach out anytime at (973) 472-6250.