2019 is almost over, but there is still time to take steps to minimize your tax liability. Here are beneficial year-end federal tax planning strategies that could be utilized to effectively reduce your tax bill for the year. Each strategy should be researched further before any decisions are implemented.
Maximizing Itemized Deductions
For 2019, the standard deduction amounts are $24,400 for joint filers and $12,200 for single filers. Because of the increased standard deduction, many individuals no longer receive a benefit for their itemized deductions. However, if you plan to make large medical or charitable contributions that would put you over the standard deduction amount, you should do so by December 31, 2019 to receive a benefit for that deduction. For 2019, you can deduct eligible expenses that exceed 10% of your adjusted gross income.
Bunching Tax Deductions
Bunching is an effective strategy to maximize the amount of itemized deductions in a given year. This involves accumulating charitable contributions and medical expenses from two or more years into one year.
For example, if in addition to having $10,000 of state tax deduction, you plan on having $13,000 of charitable contribution deduction in each of 2019 and 2020, your itemized deductions would total $23,000 and so you would instead use the standard deduction of $24,400 (assuming married filing jointly). If instead you bunch all the charitable deductions into 2019, you would have itemized deductions of $36,000 in 2019 and you would still have the $24,400 standard deduction in 2020.
Offset Capital Gains with Stock Losses
Investors should consider selling certain under performing investments by year-end to offset any capital gains they may have. Investors can generally claim up to $3,000 of capital losses per year with any unused losses carrying forward to the next year. Any long-term capital gains will be subject to a tax of 0%, 15%, or 20% depending on their income level.
Increasing 401(k) Contributions
For 2019, individuals can contribute up to $19,000 to a 401(k) plan and up to $25,000 if they are over 50 years old. The deadline for this contribution is December 31, 2019.
For 2019, individuals can contribute up to $6,000 to an IRA plan and up to $7,000 if they are over 50 years old. The deadline for this contribution is April 15, 2020.
Required Minimum Distributions from IRAs
Individuals who have reached age 70½ during 2019 and are retired should make sure that they are making their required minimum distributions (RMDs) from IRAs. Failure to take the RMD by April 1, 2020 could result in a penalty equal to 50% of the RMD amount.
Adjust Your IRS Withholding
The IRS offers a Tax Withholding Estimator to make sure individuals have enough withholding on their wages. Use the tool to review your withholding and make any necessary adjustments by year end.
Do you need help with your tax planning? Contact us to speak with a tax professional.