2019 YEAR END TAX PLANNING STRATEGIES
Now is the time to do some tax planning before the year ends.
As this year is ending, now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money come tax time. The good news is that the tax law is pretty similar to last year, which should make estimating your tax bill easier and to develop strategies with assurance of the impact it will have on your personal tax situation.
The time-tested strategy of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions. But with tax rates as low as they have been in recent history, you may want to consider accelerating income and deferring expenses to take advantage of some of the current tax rate reductions we currently have in place.
CAPITAL GAINS & LOSSES: Long-term capital gains from sales of assets held for over one year is taxed at 0%, 15%, or 20%, depending on your taxable income. A review of your investment portfolio to look for stocks to generate capital gains to take advantage in the current year at reduced rates may save you from higher rates in the future. While the market has done well in 2019, it wasn’t a straight shot up nor will every investment be a winner. Consider harvesting losses to offset capital gains as well up and up to $3,000 in ordinary income.
CONVERTING IRA’s to ROTH IRA’s: If you have a traditional IRA that is down in value but you expect it to rebound in the future, now may be the time to consider converting it to a ROTH IRA to increase your tax free appreciation down the road. The conversion may increase your current year income, which can be good if you get to utilize lower rates, but you should consider the full impact before making the conversion.
BUNCHING EXPENSES: The standard deduction amount increased in 2018 and remain at those higher levels for 2019. The increase in the deduction amounts made it difficult for a lot of taxpayers to itemize their deductions like they may have in prior years. The opportunity to “bunch” your deductions is still available. Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. By bunching in one year and taking the standard deduction in an adjacent year, the total deductions over a two year period could be increased.
MAXIMIZE YOUR RETIREMENT CONTRIBUTIONS: You should consider your options to maximize your contributions to your retirement plans. For 2019, you can contribute up to $19,000 to 401(k)’s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and $6,000 to 401(k) plan if allowed.
BUSINESS OPPORTUNITIES: Do you own your own business? You have options to consider as well. Many business owners may be entitled to a deduction of up to 20% of their qualified business income. There are limitations that need to be taken into account in order to take advantage of this major benefit for business owners. Opportunities to look at accelerating/deferring expenses should be considered before year end to ensure you get the 20% deduction in 2019. There are opportunities to look at the bonus depreciation rules currently in place along with increased section 179 deductions for the purchase of business assets that can help you increase your business deductions, or to fund retirement plan contributions for your business to ensure you get the income deduction to control your bottom line. You should consult with your tax advisor on how to achieve significant savings with respect to your business taxes by deferring income or accelerating deductions to be below thresholds in 2019 and take the maximum advantage of the tax rules benefiting small businesses.
Higher income earners need to watch for the 3.8% surtax on certain unearned income, along with the 0.9% additional Medicare tax imposed on wages and self-employed income. Proper tax planning to reduce your income levels may save you from the additional tax with careful management of your earnings and your year-end strategies.
Now is also a good time to look at your elections for 2020 for retirement plan contributions and employer’s health flexible spending accounts (FSA) to ensure you are able to fully utilize the tax savings associated with both benefits.
Not all of these opportunities will work for everyone, and with the complexity of the tax laws it is always best to sit down with a tax professional to discuss what strategies are going to work for you this year and the years to come. The end of the year is going to be here before you know it so now is the time to get your strategies set while you still have the time.