This article originally appeared in Aldrich Wealth’s 2019 Q3 Beyond the Benchmark. To view the full suite of our quarterly market commentary and newsletter, click here.
As we approach the close of another year, now is a great time to consider your financial position and, in particular, any tax savings strategies that you should implement before the start of the New Year.
Generally speaking, tax strategies often center around the shifting of income and expenses between years, and while some of these strategies might only have a small impact on the current year, layering tax planning alongside your overall financial plan can lead to significant permanent tax savings in the long-run. The tax strategies touched upon below are just a small sample to get you thinking about being strategic. Because tax planning should be driven by your unique financial picture, expectations, and wishes, we recommend you speak with an advisor prior to implementation.
Here are 11 tax planning ideas to consider before the end of 2019:
1. Realize capital losses OR capital gains on stock while substantially preserving your investment position. If you expect significant capital gains, realizing offsetting losses in your portfolio could be beneficial. Alternatively, taxpayers in a low-income year can maximize the 0% capital gains rate by recognizing capital gains and resetting their basis. It’s best to consult with an investment advisor if considering this strategy.
2. Defer bonuses. Do you have a large bonus you’re expecting to receive before the end of the year? It may be advantageous to arrange with your employer to defer year-end bonuses until early 2020. Some businesses are still able to claim the bonus expense for 2019, while the recipient can defer the income tax impact.
3. Consider bunching itemized deductions. With the higher standard deduction of $12,200, $18,350, or$24,400 based on your filing status, receiving a benefit for your itemized deductions may be complicated. You may be able to save taxes by applying a “bunching” strategy of deferring or accelerating the payment of medical expenses, charitable and other itemized deductions in a certain year.
4. Setting up a retirement plan. Retirement plans, including a solo 401(k) or a typical 401(k), need to be established by December 31, 2019 for contributions to count for this tax year. While contributions are often not due until the tax filing deadline in the following year, the plan setup needs to be done within the year you want it to be in place.
5. Consider Roth IRA conversions. Depending on your financial circumstances and tax bracket, a Roth IRA may be a more valuable retirement saving vehicle compared to a traditional IRA. A Roth conversion would allow an investor to convert money in a traditional IRA to a Roth IRA. Conversions must be made before year-end to count for that specific tax year. Also, don’t leave this to the last minute as custodians often won’t be able to process these requests within the last couple weeks of the year.
6. Strategize HSA and FSA contributions. If you become eligible by December 31, 2019, to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2019 in December. Alternatively, if you have a health flexible spending account (FSA) and you find that you did not set aside enough funds during 2019, consider adjusting the amount you contribute in 2020 (keep in mind that there are annual maximums).
7. Be aware if you need to take required minimum distributions (RMDs) from your IRA, 401(k) or other employer-sponsored retirement plans. If you are in the first year of your RMD (i.e., you turned age 70 ½ in 2019), there is an exclusive “first year” option that allows you to defer your RMD income up to April 1 of 2020. Following your first RMD, each RMD after that must be withdrawn by December 31. Therefore, if you decide to defer the first distribution, you will have to take a double distribution in 2020 — the amount required for 2019 plus the amount required for 2020. It is essential to consider your tax bracket in the first year, as well as the following year.
8. Qualified Charitable Distributions. If you have an impending Required Minimum Distribution and make annual charitable contributions, consider a Qualified Charitable Distribution. The donation is made directly from your IRA to the charity or charities of choice. The donation is not included in your income, so it reduces your Adjusted Gross Income. This strategy is especially helpful for taxpayers who don’t expect to itemize and as such, would otherwise lose the tax benefit of making charitable contributions. Don’t wait to implement this strategy until the last minute, as custodians often need a longer lead time to process these requests before December 31, 2019.
9. Strategize year-end gifting. Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. Such transfers may save income taxes when an income-producing property is gifted to family members in lower income tax brackets who are not subject to the kiddie tax.
10. Smooth income via an installment sale. Stagger income from large business/asset sales over multiple years to pay overall lower tax by rate arbitrage and have a steady stream of income. Taxes on gains from the sale are taxed pro-rata as the payments are received over time.
11. Check your withholding. Now is a great time to understand whether you have paid in enough federal and state taxes during the year to cover your income. By seeking out tax planning, you will be able to have a better overall handle on your finances to see what your additional payment might be in April 2020, whether you should make any Q4 estimated tax payments, or if you are expecting a refund.