You’ve put taxes out of your mind for
months, and you would much rather prepare for the upcoming holidays than for filling
out tax forms. But the final few months of this calendar year can be a great
time to make sure you are doing all you can to avoid paying more than you have
to for 2019 taxes. What to keep in mind…
You might be able to do better than the
standard deduction. For most of you, the standard deduction—which is $24,400 for
married couples filing jointly and $12,200 for singles—is probably the best you
can do. However, if you can move some expenses into 2019, you might be able to
boost your deductions enough to warrant itemizing rather than taking the
standard deduction.
Keep in mind that itemized deductions may
include medical expenses, mortgage interest, state and local taxes and charity.
Each of these has limitations so talk to your financial adviser to account for
those. Also be aware that any expenses pushed into 2019 will be amounts you
will not be able to deduct in 2020, creating an accelerated benefit but not a
permanent one.
An alternative strategy is to defer the
deductions into the next year—for example, moving them from 2019 into 2020. This
way you might be able to take the standard deduction one year and itemize the
next and cycle this every two years, minimizing your taxes for every two-year
period.
Example: Consider making next year’s charitable
contributions before the end of this year, either directly or through a donor-advised
fund for later distribution to your charity of choice. Alternatively, you could
hold off making charitable contributions until next year, when you escalate
your contributions, and take the standard deduction this year.
Capital gains may be subject to a 0% tax rate. This applies to taxpayers
in the 10% or 12% income tax bracket.For 2019,
married taxpayers with taxable income up to $78,950 and single taxpayers with
taxable income up to $39,475 fall into this 0% capital gains tax bracket.
If you are in that bracket and do not actually want to get rid of appreciated
shares because you want to stay invested in the asset, consider selling the shares
to realize the gain and then repurchasing them immediately to establish a
higher basis for when you ultimately no longer want to own them. Don’t worry
about the “wash sale” rules in this case—those rules apply only to losses, not
gains. The wash sale rule applies if you sell stocks at a loss and acquired or
repurchased them within 30 days. In that situation the loss would not be
deductible and would have to be added to the basis of the newly acquired shares
and you would get the tax benefit of the loss when you finally dispose of those
shares.
Capital gains might
qualify for Qualified Opportunity Zone benefits, providing either a deferral of
the gain or making the gain completely tax free. To qualify, your unrealized
capital gain must be reinvested within 180 days in economically distressed
communities and the tax law requirements must be fully complied with. If you
had a capital gain within the last 180 days you should check with a tax
specialist.
If you had a low-income year or incurred a
large business loss, it might be to your advantage to accelerate income into
2019 so it would either be taxed at a low rate or not taxed at all because of
the loss. Examples of ways to accelerate income are redeeming US savings bonds,
withdrawing or rolling over a portion of your traditional IRA into a Roth IRA
(be aware of possible early withdrawal penalties), redeeming a tax-deferred
annuity (if possible without penalty), selling appreciated short-term capital
gain stock or selling such shares and repurchasing them immediately to
establish a higher basis.
Shareholders of mutual funds that typically
distribute “capital gain dividends” prior to year-end should consider disposing
of their fund shares before those dividends are declared. Otherwise, it is quite
possible that tax on these capital gains will be greater than the actual income
earned during the year.
Traditional or
Roth IRA contributions that you are eligible to make should
be made as soon as possible to start the tax-deferred or tax-free asset growth.
A solo 401(k)
account should be opened before December 31, 2019, if you receive
income subject to self-employment tax and do not have any employees. Note that you
can delay opening a SEP to as late as the due date (including extensions) for
your 2019 tax return. Contributions to either plan does not have to be made
until sometime in 2020 (check with your tax adviser for the dates).
If you had an unusual taxable transaction
during the year, it is suggested that you meet with your tax advisor prior to
year-end to determine the tax impact of the transaction and the timing of any
required tax payments. The meeting serves multiple purposes—the
transaction can be reviewed during a less hectic time than the tax filing
season…there will be unhurried time to obtain any necessary additional
information…you can get a heads-up on the taxes due and when they need to be
paid…and this would shift time away from the filing season, which can speed up
the completion of your return.
Employees who pay out-of-pocket employee
business expenses no longer get a tax benefit that helps offset these
payments. Employees who are paid a salary and who are not subject to hourly
wage rules or who expect to receive a bonus can request that their employer
reimburse them for the expenses and reduce their remaining salary for the year
or their bonus by a similar amount. This would save the employee taxes on the
reimbursed amount, in effect giving a full deduction for those amounts, and would
save the employer its portion of the FICA and Medicare taxes. Of course, the
expenses must be fully documented when submitted to the employer.
Consider liquidating an S corporation if you had a
large capital gain from the sale of your business’s assets and you have a high
basis in the S Corp stock that would not otherwise be able to offset the gain.
If
you are required to take minimum distributions (RMD) from your IRA accounts and are eligible for the standard deduction you should
consider directing your custodian to use some of your RMD to go to a charity.
The charitable contribution will reduce taxable income distributed from your
IRA—in effect providing a deduction even though you are not itemizing. This
will also reduce your adjusted gross income (AGI), which could reduce the
amount of Social Security that might be taxable and increase deductions that
might be limited by the size of the AGI…or could reduce your Medicare premiums that
are based on AGI.
If you made a charitable contribution of
property that
is valued in excess of $5,000, you must obtain a certified appraisal before you
file your return. If you don’t have it, you will not be able to take a tax
deduction on the gift for any amount. Check with a tax adviser
on this.
You need to sign up for flexible spending
or cafeteria plan salary
reductions for next year by December 31 to be able to take advantage of this important
benefit, which will provide “tax deductions” via
a reduced salary amount on funds that would otherwise be fully taxed. Check with your
employer’s HR department on how to do this.
Take
full advantage of employer 401(k) plans that match your contributions.
Also sign up with your employer for next year as soon as possible.
If
invested in publicly traded partnerships (PTP) or hedge funds that
are insignificant to your total wealth you should consider liquidating those
positions this year. This way, starting next year, you could avoid getting K-1
forms, with 10 or more pages, that complicate your tax preparation and possibly
delay your filing if they are sent late. If you have such investments in a
retirement account such as an IRA, some of the income from the PTP or hedge
fund could become taxable in the otherwise tax-free or tax-deferred account.
Likewise, consider selling foreign-based stocks with foreign withholding tax.
If you are planning to get married or divorced, consider the tax effects of filing as married
or single if this occurs before or after the end of the year. Work it out both
ways and see whether there would be a tax savings as a result of accelerating
or delaying this life-altering event. However, of course, don’t get married or
divorced just to save on taxes.
