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Tax Planning Ideas for Year End 2019

Tax planning is probably your least favorite activity but you’ll thank us for it. Here are some tax planning ideas for year end 2019 - get this out of the way before the holidays. When January 1st is here, you’ll be glad you didn’t miss the chance to save on your 2019 taxes!

Standard Deductions vs. Itemized Deductions

The first question to consider is whether or not you’ll be taking the standard deduction. As a reminder, the new tax law increased the standard deduction to $12,000 for single filers and $24,000 for joint filers.

Consider these factors:

  • There has been an increase in the standard deduction.

  • The state and local tax deduction is now capped at $10,000.

  • Miscellaneous deductions (tax preparation fee, investment fee, unreimbursed job expenses) have been eliminated.

  • You may still be able to itemize on your state tax return, so it may be necessary to still track your itemized expenses in order to maximize your state deduction.

Have you done the math? If not please consult with a tax or financial advisor who can take you through an exercise to determine which deduction – standard or itemized – works best for you.

Remember that “bunching” certain expenses can be beneficial in certain scenarios. If you end up taking the standard deduction and you’ve been gifting to charity on an annual basis, consider bunching your charitable gifting so that it creates a larger total deduction in one single year. That way you can write it off as itemized deduction.

Also think about your healthcare expenses. If you want to itemize your medical expenses, the total must exceed 10% of your adjusted gross income. Consider bunching your expenses to 2019, if you can, to maximize your deduction.

Tax bracket changes

Have you checked what tax bracket you belong in? Good news! You may be in a lower tax bracket after the Tax Cuts and Jobs Act.  If so, consider pushing more income into the top of your tax bracket to take advantage of the lower tax rate.

For example, consider doing a Roth IRA conversion. Here’s how it works: you effectively pay taxes on pre-tax money and from now on will enjoy tax-free growth of your money in a Roth IRA.

Required Minimum Distribution

If you are older than 70 ½, remember to take your required minimum distributions from any qualified retirement plans and IRAs by the end of December. The amount of distribution is based on IRS-approved life expectancy tables and your account balance at the end of 2018. If you have an inherited IRA account, be sure to take your required minimum distributions as well. Make sure that your calculation is made correctly, and that you take your distribution in a timely fashion. If you fail to do so, the penalties can be quite high.

If you are in a high tax bracket, you may consider gifting to a charity from your IRAs. Although this charitable gifting is not deductible, it’ll count toward your RMD amount. Many taxpayers who no longer can itemize may find significant tax savings using this strategy.

Please note that the SECURE ACT, if passed by Congress, may have some significant changes to how the RMD is calculated for beneficiaries. It also many delay the age at which you must start taking RMDs to age 72.  Stay tuned for future blog posts from us on this subject.

Check your tax withholdings

The IRS adjusted the tax withholding tables when the new tax law was passed. This had a significant impact on the amount of income taxes withheld from your paycheck. As a result of this and also the elimination of many deductions, it was not uncommon for people to find themselves under withheld for 2018. This is especially true for high income earners.

Owing more taxes than expected is never a pleasant feeling. Check with your tax advisor and make sure that you understand how much will be withheld and what that means for your tax bill.

Max out your retirement contributions

Check your 401K and IRA contributions to make sure you are on track to max out your contributions and save on taxes. For more information about how much you can sock away into these accounts please refer to IRS resources.

For business owners, contributing to a SEP IRA or solo 401(k) is a way to decrease your taxable income. As you may not know your final income until the end of the year, this may mean delaying your contribution until there is more certainty. Work closely with a tax advisor and make sure that the contribution is made before you file your 2019 taxes or it will not be allowed under IRS laws.

Summary of Tax Planning Ideas for Year End 2019

This article is not intended to provide specific advice to any one person but rather to provide general guidelines. Whether you are figuring out which deduction type to take or how to sock away money in the most tax efficient way, tax planning is something that is not for those who shy away from the details. Please feel free to ask us if this article has raised questions for you and we’ll be happy to share our views on your personal situation.

Ellen Li, MSBA, CFP®