Year-End Tax Planning Moves for Individuals
As the end of the year approaches, it is a good time to think of
planning moves that will help lower your tax bill for this year and possibly
the next. Year-end planning for 2019 takes place against the backdrop of recent
major changes in the rules for individuals and businesses. For individuals,
these changes include lower income tax rates, a boosted standard deduction,
severely limited itemized deductions, no personal exemptions, an increased
child tax credit, and a watered-down alternative minimum tax (AMT).
We have compiled a list of actions based on current tax rules
that may help you save tax dollars if you act before year-end. Not all actions
will apply in your particular situation, but you (or a family member) will
likely benefit from many of them.
... Higher-income earners must be wary of the 3.8% surtax on
certain unearned income. The surtax is 3.8% of the lesser of: (1) net
investment income (NII), or (2) the excess of modified adjusted gross income
(MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses,
$125,000 for a married individual filing a separate return, and $200,000 in any
other case). As year-end nears, a taxpayer's approach to minimizing or
eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the
year. Some taxpayers should consider ways to minimize (e.g., through deferral)
additional NII for the balance of the year, others should try to see if they
can reduce MAGI other than NII, and other individuals will need to consider
ways to minimize both NII and other types of MAGI.
... The 0.9% additional Medicare tax also may require
higher-income earners to take year-end actions. It applies to individuals for
whom the sum of their wages received with respect to employment and their
self-employment income is in excess of a threshold amount. Employers must
withhold the additional Medicare tax from wages in excess of $200,000
regardless of filing status or other income. Self-employed persons must take it
into account in figuring estimated tax. There could be situations where an
employee may need to have more withheld toward the end of the year to cover the
tax.
... Long-term capital gain from sales of assets held for over
one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable
income. The 0% rate generally applies to the excess of long-term capital gain
over any short-term capital loss to the extent that it, when added to regular
taxable income, is not more than the maximum zero rate amount (e.g., $78,750
for a married couple). If the 0% rate applies to long-term capital gains you
took earlier this year, for example you are a joint filer who made a profit of
$5,000 on the sale of stock bought in 2009, and other taxable income for 2019
is $70,000, then before year end try not to sell assets yielding a capital loss
because the first $5,000 of such losses won't yield a benefit this year. And if
you hold long-term appreciated-in-value assets, consider selling enough of them
to generate long-term capital gains sheltered by the 0% rate.
... Postpone income until 2020 and accelerate deductions into
2019 if doing so will enable you to claim larger deductions, credits, and other
tax breaks for 2019 that are phased out over varying levels of adjusted gross
income (AGI). These include deductible IRA contributions, child tax credits,
higher education tax credits, and deductions for student loan interest. Postponing
income also is desirable for those taxpayers who anticipate being in a lower
tax bracket next year due to changed financial circumstances. Note, however,
that in some cases, it may pay to actually accelerate income into 2019. For
example, that may be the case where a person will have a more favorable filing
status this year than next, or expects to be in a higher tax bracket next year.
…If you believe a Roth IRA is better than a traditional IRA,
consider converting traditional-IRA money invested in beaten-down stocks (or
mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind,
however, that such a conversion will increase your AGI for 2019, and possibly
reduce tax breaks geared to AGI (or modified AGI).
... It may be advantageous to try to arrange with your employer
to defer, until early 2020, a bonus that may be coming your way. This could cut
as well as defer your tax.
... Many taxpayers won't be able to itemize because of the high
basic standard deduction amounts that apply
for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing
separately, $18,350 for heads of household), and because many itemized
deductions have been reduced or abolished. Some taxpayers may be able to work
around these deduction restrictions by applying a bunching strategy to pull or
push discretionary medical expenses and charitable contributions into the year
where they will do some tax good. If you are not sure if this
will affect you, contact us for help in determining how these changes will
impact you.
...
...
Consider using a credit card to pay deductible expenses before the end of the
year. Doing so will increase your 2019 deductions even if you don't pay your
credit card bill until after the end of the year.
... Take required minimum distributions (RMDs) from your IRA or
401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must
begin by April 1 of the year following the year you reach age 70½. Failure to take a required withdrawal can
result in a penalty of 50% of the amount of the RMD not withdrawn.
... If you are age 70½ or older by the end of 2019, have
traditional IRAs, and particularly if you can't itemize your deductions,
consider making 2019 charitable donations via qualified charitable
distributions from your IRAs. Such distributions are made directly to charities
from your IRAs, and the amount of the contribution is neither included in your
gross income nor deductible on Schedule A, Form 1040. But the amount of the
qualified charitable distribution reduces the amount of your required minimum
distribution, which can result in tax savings.
... Consider increasing the amount you set aside for next year
in your employer's health flexible spending account (FSA) if you set aside too
little for this year.
... If you become eligible in December of 2019 to make health
savings account (HSA) contributions, you can make a full year's worth of
deductible HSA contributions for 2019.
... Make gifts sheltered by the annual gift tax exclusion before
the end of the year if doing so may save gift and estate taxes. The exclusion
applies to gifts of up to $15,000 made in 2019 to each of an unlimited number
of individuals. You can’t carry over unused exclusions from one year to the
next. Such transfers may save family income taxes where income earning property
is given to family members in lower income tax brackets who are not subject to
the kiddie tax.
These are just some of the year-end steps that can be taken to
save taxes. By contacting us, we can tailor a particular plan that will work best
for you.
