With 2019 winding down, it’s time for one more look to see whether there are worthwhile tax saving opportunities that you can still take advantage of before the calendar shuts the door.
Save today by Saving for Retirement
Contributing to a retirement account is one of the best ways to save on your tax bill. In some cases there will be tax savings later instead of or in addition to current savings. To complicate matters, the timing rules will often differ depending on the type of retirement funding vehicle used.
The Roth IRA is often my first recommended savings vehicle for those who qualify. They work best when you expect to be in a higher tax bracket in retirement than today. That’s because distributions from Roth IRAs are tax-free while there is no tax deduction for the contribution.
Converting deductible IRAs to Roth IRAs is a good move for some taxpayers; especially when in a low tax bracket for the current year. This strategy has you pay tax on the converted amount (less any apportionable basis) today while allowing you to take out the funds later tax-free. The conversion must be done by the end of this year for the income to be taxable on your 2019 tax returns.
Deductible IRAs may also be worth considering when available and the tax savings today is more important than the tax savings when the funds will be distributed. Roth IRA and deductible IRA contributions for 2019 must be made by April 15, 2020, regardless of whether you extend your tax returns.
For the business owner looking to implement a retirement plan, a 401(K) must be opened by December 31, 2019, to be able to claim a 2019 tax deduction. However, the account does not need to be funded until your 2019 tax return due date including extensions, if applicable.
A business owner can open and fund a SEP IRA or SIMPLE IRA as late as this year’s tax return due date including extensions and still claim a 2019 tax deduction.
Bunching Itemized Deductions
The new (as of tax year 2018) supersized standard deduction has made an old strategy called bunching useful for many. To bunch is to pay more of a deductible item in one year and less in another year to deduct as much of your payments as possible.
For example, let’s say your $5,000 of annual charitable contributions gets you precisely to the standard deduction amount each year when combined with your other itemized deductions. In this case you get no federal tax benefit for your charitable contributions because you claim the greater of the standard deduction and your itemized deductions; which are the same. If instead you double your charitable contributions this year to $10,000 and don’t make any charitable contributions next year, you now have $5,000 less taxable income this year with no change to next year’s taxable income.
Managing Capital Gains
Take advantage of the 0% capital gains tax rate, which applies to single filers with less than $39,376 of taxable income and joint filers with less than $78,751 of taxable income. If your income level has you paying tax on your net capital gains, consider selling loss position investments to offset capital gains.
Up to $3,000 of net capital losses can be used to offset other ordinary income. Any additional net loss is carried over and available for use in subsequent years.
Avoid buying substantially the same security as one sold this year at a loss within 30 days before or after the sale or you may not be able to currently claim the loss under the “wash sale” rules. You also normally want to avoid buying mutual funds shortly before end of year capital gain distributions are owed to fund owners.
If you have a sizable capital gain, you may want to investigate investing in a property located in a qualified opportunity zone. When done properly, gain on the property sold can be deferred with additional tax breaks available depending on how long the replacement property is held.
Charitable Gifting Strategies
Gifting highly appreciated assets to charity when you itemize your deductions is often a sound strategy. The asset donation eliminates the tax on the appreciation while still getting to claim the fair market value of the donated property as a charitable deduction.
Donate directly to charity from your IRA when you’re at least age 70½ to minimize or eliminate income generated from your required minimum distribution. Up to $100,000 of IRA distributions per spouse can be excluded when making this election.
On the surface it may seem like there is no advantage to donating IRA funds directly to charity because you can’t claim the charitable contribution deduction when excluding the income. However, this method reduces adjusted gross income, which can in some cases increase the amount of medical expense deduction allowed, decrease the amount of social security benefits included in taxable income and reduce the net investment income tax and additional Medicare tax.
A donor advised fund is a charitable vehicle that allows you to deduct your contribution to the fund in the year of your payment and then donate from the fund to the charities of your choosing when you choose to. The tax savings can potentially be maximized by gifting appreciated assets to the fund and also using the bunching strategy. When using the bunching strategy in conjunction with a donor advised fund, you can make payments to the charities each year, if desired, while maximizing your tax benefit.
Flexible Spending Account
Use up your 2019 flexible spending account allocation before it is lost. Be aware of whether your plan allows you to carry over up to $500 of unused balance to next year or a two-and-a-half month grace period to use up the remaining balance. Consider a December appointment with your dentist, chiropractor or physical therapist if due to go soon anyway if a remaining balance would otherwise go to waste. Or maybe stock up on contact lens supplies or purchase new prescription glasses, hearing aids or other products you may need soon anyway.
For help understanding or implementing any year-end tax planning strategies, contact your SDK representative or this article’s author, Steve Warren for more information.