By Matthew Gaude & Shawn McGuire
This may be hard to believe, but there are only 2 months left in 2019! Although you might be just trying to keep up, it’s important to look ahead and start thinking about year-end tax planning. Why? Because the best way to minimize your taxes is to be proactive. If you wait until the last minute, you might miss out on some tax-efficient opportunities. That’s why we want to share some ideas to help you get your tax situation organized before we ring in 2020.
1. Decide If You Want To Itemize
With the new tax law in place, the standard deduction is now $12,200 for individuals and $24,400 for married couples filing jointly. The TCJA eliminated many standard deductions, including miscellaneous deductions for tax preparation fees, investment expenses, home office expenses (unless you’re self-employed), and unreimbursed employee business expenses. It also capped the deduction for state and local income tax (SALT) at $10,000 and limited the home mortgage interest deduction to acquisition indebtedness up to $750,000 in mortgage loan interest (for new mortgages taken out since 2018; the limit remains $1,000,000 for all existing mortgages). The floor for unreimbursed medical expenses, which was temporarily lowered to 7.5% of adjusted gross income (AGI) for tax years 2017 and 2018 only, reverted to 10% of AGI in 2019.
These changes resulted in fewer taxpayers being able to itemize on their returns under the new law. However, for many taxpayers, the significant increase in the standard deduction made up for the loss of itemized deductions. However, taxpayers still need to tally up their allowable deductions in 2019 to determine if they add up to more than the standard deduction. If you know your deductible expenses will exceed those amounts, then you’re good. But if you want to itemize and are coming in under the standard deduction amount, you need to take action soon. For example, you could write a check to a charity or deposit into a donor-advised fund. If you have some medical procedures you’ve been putting off, try to sneak them in before December 31st. Or you can also prepay your property taxes that accrued this year but aren’t due until sometime in 2020.
2. Make Sure You Fund Your Retirement Accounts
Contributing the maximum allowed to tax-deferred retirement accounts such as 401(k)s or IRAs, is one of the most effective ways to reap the tax benefits and reduce taxable income. In 2019, you can contribute up to $19,000 to a 401(k) or 403(b) in the form of salary deferrals. And if you’re 50 or older in 2019, you can make an additional $6,000 catch-up contribution, for a total maximum contribution of $25,000. (In 2020, these limits will increase to $19,500, and $6,500 for catch-up contributions. If you’ll be 50 or older next year, that provides an opportunity to reduce your taxable income by $26,000 in 2020.) The contribution limits for individual retirement accounts (IRAs) have also increased in 2019, to $6,000 for those under age 50, and an additional $1,000 catch-up contributions for those age 50 or over, for a total annual contribution of $7,000. (IRA limits will remain the same in 2020.) In addition, many employers match some or all of your contributions.
Even if you can’t save up to the limit, deposit as much as you can before the end of the year and at least enough to receive your full employer match. Free money into a tax-deferred account is a tax-planning dream!
If you participate in an employer-sponsored retirement plan, you may be able to designate some or all of your contributions as Roth contributions. While Roth contributions are made on an after-tax basis and don’t reduce your current MAGI, qualified distributions will be tax-free. Roth contributions may be especially beneficial for higher-income earners who are ineligible to contribute to a Roth IRA.
Keep in mind you only have until December 31st to maximize your 401(k), 403(b) or other employer-sponsored retirement plan contributions for the 2019 tax year. This is unlike individual retirement accounts, or IRAs, where you can make 2019 contributions up until April 15, 2020.
3. Give The Gift Of Education
While 529 accounts are funded with after-tax money, it could save you on taxes in the future since the money grows tax-free and no taxes are due when you take the money out for qualified expenses. Plus, some states offer a tax deduction or credit for 529 plan contributions. (1) Also, if you’re thinking ahead to estate planning and want to avoid hefty gift taxes, you can gift up to $15,000 per beneficiary annually without having to fill out the federal gift tax form.
4. Max Out Your HSA
If you have access to a Health Savings Account (HSA) with your high-deductible health plan, you can enjoy triple-tax savings with no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. Your contributions are tax-deferred and withdrawals are tax-free for medical expenses.
Since your balances roll over from year to year, you can max out the account without worrying about using it up right away. For 2019, the contribution limit is $3,500 for an individual and $7,000 for a family, with a $1,000 catch-up bonus for those over 55.
5. “Bunch” Deductions
December 31 is the deadline for capturing medical expenses or making charitable donations for the 2019 tax year. Some taxpayers may find themselves on the fence when it comes to itemizing due to a significant amount of unreimbursed medical expenses, or a desire to take advantage of the higher floor for charitable deductions, which rose to 60% of AGI under the new law.
“Bunching” deductions into the current tax year is a strategy you may want to explore to increase your itemized deductions. For example, if you have a significant amount of unreimbursed medical expenses, it may make sense to accelerate elective treatments, procedures, or medical equipment costs into 2019 if your combined deductions will bring you over the standard deduction amount.
If bunching charitable deductions in years where you will be able to itemize makes sense in your situation, you may want to consider a donor-advised fund to achieve that goal. Donor-advised funds are established with public charities. As the donor, you transfer money or appreciated stock and receive a deduction in the year the charitable donation is made. For example, let’s say you plan to give $4,000 a year to charity over the next five years, for a total of $20,000.
While your annual $4,000 donation may not be enough for you to itemize and thus realize a deduction for your charitable gift, “bunching” five years of charitable deductions into a single tax year may enable you to deduct your charitable donations. If donating the full $20,000 in 2019 (5 X $4,0000) would enable you to itemize on your tax return, you would then take the standard deduction in the remaining years (2020 through 2023). The contributions within your donor-advised fund could still be disbursed to the charity on an annual basis over the five-year period. However, keep in mind that contributions to a donor-advised fund are irrevocable.
Make the most of your generosity when donating to charitable organizations. Contribute appreciated assets such as stocks or shares in mutual funds, provided you have owned the property for more than a year. If so, you can deduct the full value and neither you nor the charity pays tax on the appreciation.
6. Consider A Roth IRA Conversion
If you have a traditional IRA, consider whether you might benefit from converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth, while providing important estate planning advantages. Unlike traditional IRAs, Roth IRAs are not subject to RMDs so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.
While there’s no income-based limit governing who can convert assets to a Roth IRA, the amount converted to a Roth is taxable in the year of the conversion. Whether a conversion makes sense for you depends on a number of factors, such as your age; whether the conversion would push you into a higher income tax bracket; your current tax bracket now and expected tax bracket in retirement; and whether you can afford to pay the tax on the conversion, among other considerations. You do not need to convert the entire amount to a Roth at one time. You can transfer the money in stages over time, and space out the taxes owed on the conversion.
Keep in mind, under the Tax Cuts & Jobs Act (TCJA), you no longer have the option to undo a Roth IRA conversion by “recharacterizing” the account as a traditional IRA. However, you can still recharacterize new Roth IRA contributions as traditional contributions if you do it by the applicable deadline and meet all other rules.
7. Annual Gifting
You can give up to $15,000 to each person in 2019 without paying gift tax or tapping your lifetime estate and gift tax exemption. Your spouse can also give $15,000 to the same person done in 2019, for a total of $30,000 tax-free gift. Any unused amount is gone forever. You cannot give extra next year to make up for it. Annual gifts over the exclusion amount will trigger the filing of a gift tax return for the year. But no gift tax will be due unless your total lifetime gifts exceed $11,400,000.
8. Make A Qualified Charitable Contribution (QCD)
If you’re over age 70 ½ and have an individual retirement account (IRA), a qualified charitable contribution (QCD) may be a more beneficial way to satisfy your charitable giving goals, especially if you don’t have enough deductions to itemize. With a QCD, the custodian of your traditional IRA makes distributions directly to a charitable organization on your behalf. The advantage here is that distributions paid directly to a charity are not taxable and will not be added to your adjusted gross income, so it will not trigger a Medicare premium surcharge and will count toward your required minimum distribution (RMD) for the year. You can direct all or a part of the RMD (up to $100,000 per tax year) to a qualified charitable organization and you will only be taxed on any remaining portion of the distribution that you received. You cannot deduct the donation.
Transfers to a donor-advised fund, charitable gift annuity, charitable remainder trust or any other life-income or split interest gift arrangement are not treated as a Qualified Charitable Contribution. Make sure you obtain a receipt from the charity to substantiate the donation.
9. Required Minimum Distributions
Pay attention to the required minimum distribution rules for traditional IRA’s. If you are 70 ½ and older, you must take withdrawals by year-end or pay a fine equal to 50% of the shortfall. The amount of your RMD is based upon your year-end IRA account balance, your age, and life expectancy as defined by the IRS. The sum of your RMD can be taken from any IRA (if you have multiple IRA’s). If you turned 70 ½ this year, you can delay 2019’s payout until April 1, 2020, though the distribution is still based on your total IRA balance as of December 31, 2018.
Similar rules apply to 401(k) plan payouts, except people who own 50% or less of a company and work past age 70 ½ can delay taking distributions until they retire, and the RMD must be taken from each 401(k) account.
Why Pay More In Taxes When You May Not Have To?
Tax planning can be a smart way to not only move closer to realizing your goals, but in identifying gaps in your overall financial plan. Engaging in tax planning throughout the year can help lessen or shift your tax burden, free-up more money to save or spend, and help you avoid mistakes that can result in penalties or paying more than your fair share.
However, you never want to make decisions based solely on the tax consequences. Tax planning is part of a comprehensive approach to planning driven by your financial and lifestyle goals.
Before putting any of these strategies in place, be sure to meet with your CPA or tax professional, as well as your financial advisor to coordinate and implement the strategies that are right for you.
We Can Help
Tax planning is one of the most critical aspects of your financial plan because you can save significant amounts of money by implementing strategies and working the tax law to your advantage. Because it’s so important, you should turn to a knowledgeable professional to help you make the right tax decisions and set up your tax plan for success, year after year. If you’d like to learn more about how we can meet your financial and tax planning needs, call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.