By Stephanie Casey, Tax Senior Manager | Family, Executive & Entrepreneur Advisory Services Team
As the end of the year approaches, it is a good time to think of various planning techniques that will help reduce your tax bill for this year and possibly the next. Some items small, others not so small, but a cohesive plan to review multiple strategies is best. Year-end planning for 2019 takes place against the backdrop of the 2017 law changes.
Tax changes that continue to have a major impact on individuals include:
- Lower income tax rates
- A boosted standard deduction
- Limitations on itemized deductions
- No personal exemptions
- An increased child tax credit
- A less powerful Alternative Minimum Tax (AMT)
Despite these major changes, the time-tested approach of postponing income until 2020 and accelerating deductions into 2019 is likely a good way to cut your tax bill, especially 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.
We have compiled a list of actions based on current tax rules that may help you save 2019 tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) could benefit from many of them.
Entrepreneur and Executive Year-End Tax Planning Opportunities
- Meet with your Tax Advisor
December is a good time to meet with a tax advisor. Your 2018 tax filings have been completed (October 15 the latest extended deadline) and using the 2018 tax return is often a good starting point for 2019 planning.
If you sit down and do some planning between now and the end of the year, you can make sure you are doing everything you can before year end to minimize tax. Your advisor can help pinpoint strategies to reduce taxable income and maximize deductions.
- Sell Stocks for Gains or Losses
Long-term capital gain (LTCG) from sales of assets held for over one year are 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 12% rate amount (e.g., $78,750 for a married couple). If the 0% rate applies to you, consider selling enough stock to generate long-term capital gains sheltered by the 0% LTCG rate.
Consider recognizing any losses that you currently have in your stock portfolio to offset any capital gains if you are over the 0% LTCG rate. You can deduct a net $3,000 capital loss against ordinary income in the current year, any additional losses carry forward indefinitely. Remember, taxpayers who liquidate their loss positions must wait at least 31 days after the sale date before buying the same security back if they want to deduct the loss on their tax returns. If they buy back in before that time, the loss will be disallowed under the IRS wash sale rule.
- Increase contributions to your FSA and/or HSA
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. Good news, the HSA contribution for 2019 can be made up until April 15, 2020.
- Consider Investing in a Qualified Opportunity Zone
The Tax Cuts and Jobs Act created what is known as Qualified Opportunity Zones (QOZs), a program allowing taxpayers to defer payment of capital gain tax until the 2026 tax year if such gains are invested in opportunity zones. The newly created zones are in locations around the country, many of which were established in 2018, that would benefit from economic development and job creation. The QOZ investment must generally be made within 180 days of the sale that generated gains. If the gain is generated by an LLC or S Corporation, the date of the gain may be deemed to be December 31.
While the QOZ tax benefits are powerful and attractive, careful attention must continue to be paid to qualifying date of investment, entity formation, deal structure, future tax rates, pricing, discount rates, risk, and long-term economic outlook.
- Maximize IRA contributions
If you are younger than age 70½ at the end of 2019, consider contribution to an IRA to maximize funds in tax deferred accounts. Depending on your AGI, consider the use of a ROTH IRA which provides permanent tax savings on any appreciation in the ROTH IRA.
Added benefit: when you reach age 70½ you can choose to make your charitable donations directly from your IRA using a qualified charitable distribution.
- Convert to a Roth IRA
Consider converting a traditional-IRA into a Roth IRA in 2019. If you do not anticipate using the IRA funds during your lifetime, ROTH IRAs can also be valuable assets to pass to your heirs on a tax advantaged basis. Keep in mind, however, that such a conversion will increase your AGI for 2019 and your current tax due. This current tax bill should be considered as part of the overall economic benefit of the strategy. Beginning in October of 2018 you can no longer “unconvert” a Roth IRA back to a traditional IRA once it is done.
- Consider a backdoor Roth IRA Contribution
In 2019, if your modified adjusted gross income (MAGI) is higher than $137,000 (single) or $203,000 (married filing jointly or qualifying widow[er]), you can’t contribute directly to a Roth IRA. However, if you have no other IRAs, what you can do is contribute the annual maximum amount of $6,000 or ($7,000 if you’re 50 or older) to a nondeductible traditional IRA. Then, immediately convert that to a Roth IRA. The conversion is nontaxable as you are using after tax dollars. As noted, if you have other IRAs, you have to consider those in the calculation of income upon conversion. For example, if you have a traditional IRA with $95,000 of money from a 401(k) rollover (the $95,000 contributions were made on a pre-tax basis), and you make a $5,000 nondeductible contribution to a new IRA, the conversion would be 95% taxable.
- Maximize Contributions and Distributions for 529 Plans
Consider funding Virginia 529 plans for high school and college savings. In a 529 account, your money can grow free from federal taxes and be used to fund qualified higher education expenses at eligible educational institutions nationwide. Virginia taxpayers enjoy the additional benefit of a state income tax deduction on contributions to their Virginia529 accounts. A taxpayer can deduct $4,000 per account for a Virginia 529 plan. Starting January 2018, you can also use up to $10,000 per year in 529 funds toward a beneficiary’s private or religious K-12 school tuition.
- Charitable Contributions
Many taxpayers will no longer itemize because of the higher 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 are using a bunching strategy where they will make a larger charitable contribution every other year and then take the standard deduction in the between year.
When making your charitable contributions, do consider donating appreciated securities instead of cash. You receive the tax deduction for the fair market value of the stock, without ever having to realize and pay tax on the gain. Don’t forget to make the stock transfer or mail the check by December 31st to get the deduction in 2019.
- Charitable Donations from your IRA
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. This helps to keep your AGI as low as possible and claim the benefit of both a charitable deduction and the standard deduction. Additionally, the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can also result in tax savings.
- Review your medical expenses
In 2019, you can deduct qualified, unreimbursed medical expenses that exceed 10% of your adjusted gross income. If your total medical expenses for the year are close to the 10% threshold, it might be time to schedule that procedure you’ve been delaying. You can’t deduct cosmetic procedures or general healthcare purchases like toothbrushes or gym memberships. But you can deduct the costs of your prescriptions, contact lenses, and hearing aids, as well as therapy sessions, surgeries, and preventative care treatments. You will have to itemize your deductions to claim the medical expenses deduction, so this doesn’t apply if you take the standard deduction.
- Redeem U.S. savings bonds to pay college costs
Unless a taxpayer elects otherwise, the interest on Series EE and Series I savings bonds is not taxed currently. No tax is due until the bonds are redeemed or reach final maturity. Moreover, if certain requirements are met, an individual who redeems EE bonds issued after ’89 or I bonds during the same tax year that he pays the cost of attending college, vocational school or other post-secondary educational institution (for the individual, a spouse, or a dependent) may exclude all or part of the interest income that would otherwise be taxable.
- Consider Federal or State Tax Credits
There are several federal and state credits available to help reduce taxes. On the federal level, there are credits for education, health, child and dependent care credits. These are the most common used ones. But, there are credits for other items as well, such as elderly and disabled, adoption, savings, residential energy and alternative motor vehicle credits. These are all federal credits.
Virginia has their own set of credits that offset state taxes. Some of these include different fuel credits, land preservation, neighborhood assistance, historic rehabilitation and recycling credits.
- Leverage the Gift Tax Exclusion
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. Each person’s tax situation is unique. We can help you narrow down the specific actions that you can take to fit your needs for successful tax planning this year. Contact your Keiter representative as we are here to help.
- 2019/2020 Tax Planning Guide
- Charitable Contributions: Changes with the New Law
- 2020 Cost of Living Adjustment for Pension Plans and other related items
- Donor-Advised Funds: Why This Might Be Your Valuable Charitable Tool
- How Taxpayers can save with a Qualified Charitable Distribution
- Qualified Opportunity Zone Investments
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.