Amazing at it may seem, 2019 is quickly fading and it’s actually time to start making those year end tax moves to get ready for April…now!
As you’re putting the finishing touches on your financial and tax planning for this year, there’s a lot to review. The second tax year under the Tax Cuts and Jobs Act (TCJA) of 2017 has brought to light some additional considerations that were either unclear or overlooked in 2018. Sometimes, when laws like this one come along you learn from them slowly. So here are some year end tax planning strategies for individual taxpayers, Schedule C taxpayers and business owners to carefully consider.
Look at Your Income
Look carefully at the income taxes you pay and may owe! Whether you work with a tax advisor, a computer program, or simply do it yourself with pen and paper to prepare, you need to make an income tax projection for both 2019 and 2020.
Defer income to 2020, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
You’ll also have to decide whether you are going to have major tax deductions or go with the now large standard deductions which may make other deductions obsolete for the average wage earner. Consider “bunching” your deductions.
The Alternative Minimum Tax (AMT)
Also look at accelerating the paying of some expenses in the current year or deferring some payment to the following year, whichever works best to your advantage. Make sure you examine the Alternative Minimum Tax (AMT) this year and, if it applies to you, evaluate ways to minimize your exposure.
If you’re subject to the AMT, traditional year end tax maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows several itemized deductions. For example, if you’re subject to the AMT in 2019, prepaying 2020 state and local taxes probably won’t help your 2019 tax situation, but could hurt your 2020 bottom line. Taking the time to determine whether you may be subject to the AMT before you make any year end moves could help you avoid a costly mistake.
Check Your Withholding
Lastly, check your current tax withholding to avoid any interest and penalties for underpayments. If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (on Form W-4) to increase your withholding for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.
Look at your Investments
Review your asset allocations to determine if any rebalancing is necessary. This is something that you need to do as a new year approaches, and you have a history of 2019 that can help you evaluate your current performance and the changes needed. Make sure to confirm whether your investments are aligned with your risk tolerance and investment objectives.
Consider harvesting capital losses to offset realized capital gains. In addition, you can deduct up to $3,000 of capital losses against ordinary income and carry forward excess capital losses to future years until exhausted.
If you are planning to purchase a mutual fund in a taxable account before year end, check whether the fund is expected to make a sizable capital gains distribution. If so, consider deferring the purchase until after the record date of the distribution.
Look at Your Retirement Plan
Maximize your 401(k), 403(b) or other company plan contributions. If you are 50 years or older, catch-up contributions are allowed, so do it if you can now. Maximizing your IRA contributions can’t ever be stressed enough.
Look at converting Traditional IRAs to Roth IRAs, especially if you are either 1) in a low tax bracket and can pay the taxes now with other funds available or 2) have a large net operating loss that can offset the income that is triggered on a Roth conversion.
If you are 70½ or older this year, make sure you review when you must take your Required Minimum Distribution (RMD). The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
Deductible contributions to a Traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2019 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year end.
If you are self-employed, consider opening and funding a SEP IRA or solo 401(k).
Beware the 3.8% Net Investment Income Tax. This additional tax may apply to some or all of your net investment income if your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).
Finally, check all beneficiary designations (both primary and contingent) on all retirement plans.
Look at Your Insurance Policies
Be sure to review all of your current insurance policies, now and every year.
If you have experienced any recent major life events such as birth, death, marriage, divorce, etc., revisit the amount and type of coverage and make any necessary changes.
Check the beneficiary designations for all insurance policies.
Request an in-force ledger for all permanent life insurance policies to determine whether those policies are still performing as expected.
If you are making gifts of premiums to an Irrevocable Life Insurance Trust (ILIT), make sure the trustee is providing annual Crummey letters to the beneficiaries.
Look at Gifting to Family Members
Consider using your annual gift tax exclusion amount ($15,000 per person) for cash gifts or to fund 529 education plans for your children.
Or consider using all or a portion of your lifetime federal estate, gift, and generation skipping trust (GST) exemption amounts ($11,400,000 in 2019) by creating and funding an irrevocable trust.
Before gifting any asset, know the cost basis and tax consequences to the recipient.
Revisit your gifting strategies and your estate planning documents.
Look at Charitable Donations
Consider using low-basis stock or other highly-appreciated assets (held for more than one year) to fund your charitable gifts.
Evaluate whether a charitable vehicle (i.e. donor advised fund, private foundation, charitable trust, etc.) would be appropriate.
If you are 70½ or older this year, consider making a 2019 charitable donation directly from your Traditional IRA via a qualified charitable distribution (QCD). (Note: QCDs cannot be made to a donor advised fund or private foundation.)
There’s a lot to think about when it comes to year end tax planning. That’s why it may make sense to talk to a tax professional who can evaluate your situation and help you determine if any year end tax moves apply to your situation. Sometimes what appears to be simple isn’t and that misjudgment can cost you more than the fees to have someone who is more expert look at it.
Do you perform a year end tax review each year?