With a short amount of time remaining in the year, now is the time to proactively review your finances to trim your tax bill. Here are some of our favorite strategies.
Harvest stock losses: Review stock sales and harvest tax losses to offset capital gains. Losses can reduce taxable income by $3,000 for joint filers, while capital losses have an unlimited offset for capital gains. Any unused capital losses carry forward indefinitely. To avoid the “wash sale” rule, remember that you cannot trade the same security for 31 days.
Consolidate itemized deductions: The standard deduction is now $12,200 per person. As such, fewer people benefit from itemizing deductions. However, you can bunch expenses together. In doing so, concentrate donations in years you itemize and limit them in years you take the standard deduction. Property taxes and state and local taxes are now limited for deductibility. Consider making two years’ worth of donations in late December. Similarly, you can pay property taxes in December for 2019 and 2020.
Delay or accelerate income or expenses: Some income or expenses can be delayed until 2020 or accelerated into this year. This is especially important if itemizing deductions. Expenses that can be pushed or pulled might be estimated property taxes due next year, estimated state income taxes due next year, mortgage interest, medical bills or charitable donations. Consulting fees or commissions might be pushed into one year versus the next.
Property taxes: The amount that can be itemized for property and state income taxes or sales taxes is a combined $10,000. Depending on the value of your property, the sales tax deduction may be more valuable for Texas residents since we do not have an income tax. Again, consider bunching two years’ worth in 2019.
Medical expense deductions: Beginning in 2019, taxpayers may deduct only the total amount of unreimbursed allowable medical care expenses for the year that exceeds 10% of adjusted gross income.
Fund retirement: The 401(k), SEP or IRA all offer opportunities for a tax deduction on contributions, tax deferral on earnings and protection from creditors. Even if your employer does not offer a match, a 401(k) is still a very worthwhile opportunity. You can also fund an IRA for a non-employed spouse.
Convert a traditional IRA to a Roth IRA: This causes the amount converted to be taxed this year. However, once converted, the assets and earnings in the Roth are tax-exempt. Since the lower tax brackets have been expanded, it pays to analyze how much can be converted before bumping into the next higher tax bracket. Additionally, a Roth IRA is not subject to age 70½ required minimum distributions.
Donate a required minimum distribution: People age 70½ or older have required distributions from their 401(k) or traditional IRA. This required distribution is counted as fully taxable income unless you donate it to charity. A qualified charitable distribution sends the RMD directly to a qualified charity of your choosing. The charity gets the full amount of the distribution and you pay no tax on the RMD. It’s a “win-win” proposition.
Donate appreciated stock or other assets. Assume you have stock or other property you’ve held for quite some time with significant appreciation. If you sell that asset to fund a charitable bequest, you must first pay taxes upon liquidation. However, if you donate the appreciated asset directly to your favorite nonprofit, they get the full benefit of the donation and you avoid paying capital gains tax. Furthermore, you still qualify for a charitable deduction on your tax return if you itemize. This is a superior way to benefit charity versus donating cash.
The kiddie tax: The kiddie tax assesses a child’s investment income above $2,200 at the same rates as trusts and estates – which is typically higher than individual rates. If the child is a full-time student providing less than half their financial support, the tax usually applies until the child turns 24 years old. Long-term capital gains and qualified dividends retain favorable rates even if held by a child, trust or estate.
I never thought I’d become a tax nerd when I got into this business. However, knowing the rules and strategies can save you real money.