You’ve put taxes out of your mind for months, and you would much rather prepare for the upcoming holidays than for filling out tax forms. But the final few months of this calendar year can be a great time to make sure you are doing all you can to avoid paying more than you have to for 2019 taxes. What to keep in mind…
You might be able to do better than the standard deduction. For most of you, the standard deduction—which is $24,400 for married couples filing jointly and $12,200 for singles—is probably the best you can do. However, if you can move some expenses into 2019, you might be able to boost your deductions enough to warrant itemizing rather than taking the standard deduction.
Keep in mind that itemized deductions may include medical expenses, mortgage interest, state and local taxes and charity. Each of these has limitations so talk to your financial adviser to account for those. Also be aware that any expenses pushed into 2019 will be amounts you will not be able to deduct in 2020, creating an accelerated benefit but not a permanent one.
An alternative strategy is to defer the deductions into the next year—for example, moving them from 2019 into 2020. This way you might be able to take the standard deduction one year and itemize the next and cycle this every two years, minimizing your taxes for every two-year period.
Example: Consider making next year’s charitable contributions before the end of this year, either directly or through a donor-advised fund for later distribution to your charity of choice. Alternatively, you could hold off making charitable contributions until next year, when you escalate your contributions, and take the standard deduction this year.
Capital gains may be subject to a 0% tax rate. This applies to taxpayers in the 10% or 12% income tax bracket.For 2019, married taxpayers with taxable income up to $78,950 and single taxpayers with taxable income up to $39,475 fall into this 0% capital gains tax bracket. If you are in that bracket and do not actually want to get rid of appreciated shares because you want to stay invested in the asset, consider selling the shares to realize the gain and then repurchasing them immediately to establish a higher basis for when you ultimately no longer want to own them. Don’t worry about the “wash sale” rules in this case—those rules apply only to losses, not gains. The wash sale rule applies if you sell stocks at a loss and acquired or repurchased them within 30 days. In that situation the loss would not be deductible and would have to be added to the basis of the newly acquired shares and you would get the tax benefit of the loss when you finally dispose of those shares.
Capital gains might qualify for Qualified Opportunity Zone benefits, providing either a deferral of the gain or making the gain completely tax free. To qualify, your unrealized capital gain must be reinvested within 180 days in economically distressed communities and the tax law requirements must be fully complied with. If you had a capital gain within the last 180 days you should check with a tax specialist.
If you had a low-income year or incurred a large business loss, it might be to your advantage to accelerate income into 2019 so it would either be taxed at a low rate or not taxed at all because of the loss. Examples of ways to accelerate income are redeeming US savings bonds, withdrawing or rolling over a portion of your traditional IRA into a Roth IRA (be aware of possible early withdrawal penalties), redeeming a tax-deferred annuity (if possible without penalty), selling appreciated short-term capital gain stock or selling such shares and repurchasing them immediately to establish a higher basis.
Shareholders of mutual funds that typically distribute “capital gain dividends” prior to year-end should consider disposing of their fund shares before those dividends are declared. Otherwise, it is quite possible that tax on these capital gains will be greater than the actual income earned during the year.
Traditional or Roth IRA contributions that you are eligible to make should be made as soon as possible to start the tax-deferred or tax-free asset growth.
A solo 401(k) account should be opened before December 31, 2019, if you receive income subject to self-employment tax and do not have any employees. Note that you can delay opening a SEP to as late as the due date (including extensions) for your 2019 tax return. Contributions to either plan does not have to be made until sometime in 2020 (check with your tax adviser for the dates).
If you had an unusual taxable transaction during the year, it is suggested that you meet with your tax advisor prior to year-end to determine the tax impact of the transaction and the timing of any required tax payments. The meeting serves multiple purposes—the transaction can be reviewed during a less hectic time than the tax filing season…there will be unhurried time to obtain any necessary additional information…you can get a heads-up on the taxes due and when they need to be paid…and this would shift time away from the filing season, which can speed up the completion of your return.
Employees who pay out-of-pocket employee business expenses no longer get a tax benefit that helps offset these payments. Employees who are paid a salary and who are not subject to hourly wage rules or who expect to receive a bonus can request that their employer reimburse them for the expenses and reduce their remaining salary for the year or their bonus by a similar amount. This would save the employee taxes on the reimbursed amount, in effect giving a full deduction for those amounts, and would save the employer its portion of the FICA and Medicare taxes. Of course, the expenses must be fully documented when submitted to the employer.
Consider liquidating an S corporation if you had a large capital gain from the sale of your business’s assets and you have a high basis in the S Corp stock that would not otherwise be able to offset the gain.
If you are required to take minimum distributions (RMD) from your IRA accounts and are eligible for the standard deduction you should consider directing your custodian to use some of your RMD to go to a charity. The charitable contribution will reduce taxable income distributed from your IRA—in effect providing a deduction even though you are not itemizing. This will also reduce your adjusted gross income (AGI), which could reduce the amount of Social Security that might be taxable and increase deductions that might be limited by the size of the AGI…or could reduce your Medicare premiums that are based on AGI.
If you made a charitable contribution of property that is valued in excess of $5,000, you must obtain a certified appraisal before you file your return. If you don’t have it, you will not be able to take a tax deduction on the gift for any amount. Check with a tax adviser on this.
You need to sign up for flexible spending or cafeteria plan salary reductions for next year by December 31 to be able to take advantage of this important benefit, which will provide “tax deductions” via a reduced salary amount on funds that would otherwise be fully taxed. Check with your employer’s HR department on how to do this.
Take full advantage of employer 401(k) plans that match your contributions. Also sign up with your employer for next year as soon as possible.
If invested in publicly traded partnerships (PTP) or hedge funds that are insignificant to your total wealth you should consider liquidating those positions this year. This way, starting next year, you could avoid getting K-1 forms, with 10 or more pages, that complicate your tax preparation and possibly delay your filing if they are sent late. If you have such investments in a retirement account such as an IRA, some of the income from the PTP or hedge fund could become taxable in the otherwise tax-free or tax-deferred account. Likewise, consider selling foreign-based stocks with foreign withholding tax.
If you are planning to get married or divorced, consider the tax effects of filing as married or single if this occurs before or after the end of the year. Work it out both ways and see whether there would be a tax savings as a result of accelerating or delaying this life-altering event. However, of course, don’t get married or divorced just to save on taxes.