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It’s the most wonderful time of the year, time to make money saving and headache-preventing moves before we roll into 2020.
1. Confirm Your Withholding: Last tax season there was a lot of moaning about refunds being lower than the prior year. That was mostly due to the change in tax law, whereby many taxpayers had bigger paychecks throughout the year, but if you want to avoid surprises, now is the time to take action. Go to IRS.gov and use the agency’s withholding estimator. Check to see if you are on track this year before it is too late. If you need to increase or decrease your withholding, contact your company’s payroll department immediately.
2. Self-Employed/Side Hustler Tax Check: If you are earning income and no organization is withholding taxes on your behalf, you should be making quarterly tax estimates to avoid the dreaded April surprise. If you have not done so, now is the time to figure out what is due so you can address what you owe.
3. Determine Whether You Can Itemize: 90 percent of taxpayers are expected to claim the standard deduction (the amount of income that is not subject to tax) in 2019 ($12,200 for Individuals, $24,400 for Married Filing Jointly and $18,350 for Head of Household). The standard deduction was expanded with the tax overhaul that went into effect in last year, which means that many who used to write off certain items, were no longer able to do so.
But if you purchased a house in an area with high local taxes, have assumed a mortgage or were especially charitable this year, you may benefit from itemizing. Given the higher standard deduction threshold, consider “bundling” or “bunching” charitable gifts, whereby you give larger, lump-sum gifts, which represent present and future contributions. Doing so may allow you to itemize and as a result, capture the tax benefit associated with giving.
4. Slash Your Tax Bill With Uncle Sam’s Help: The best way to reduce your tax liability for this calendar year is to maximize your retirement plan contributions. If your cash flow allows, contact your HR department to see if you can increase your contributions before the end of the year. If you are self-employed or have made some extra money from a part time job or as a contractor, you may want to establish your own retirement plan (check out this post on the type of plan that may be best for you). Most plans, with the exception of a SEP-IRA, must be established (though not funded) by December 31.
5. Take The Bull By The Horns: If you itemize and have a taxable investment account, use the multi-year bull market to your advantage. You can gift highly appreciated securities to qualified charities and by doing so, you can write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains.
6. Embrace The Losers: Despite stock indexes rising in 2019, you may still have a clunker in your account. The good news is that you can sell investments with losses in taxable accounts, which can be used to offset gains during the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years. Don’t be stubborn, just because you think the investment is “coming back,” just sell it and move on.
7. Take Required Minimum Distributions (RMD): You must withdraw money from retirement accounts after you turn 70 ½, unless you are still working. Failure to do so results in a 50 percent penalty on the amount you should have taken. If you have multiple IRAs, you only need to take one RMD based on your age and the total value of the accounts. BUT, if you also have a 401(k) or 403(b), you need to take the RMD from each account individually. (Consult IRS.gov for more specifics.)
If you don’t need your RMD, then consider a Qualified Charitable Distribution (QCD), which allows you to direct some or all of your RMD to the charity of your choice. You don’t get to count a QCD towards your charitable deduction, but you avoid being taxed on the money.
8. Take Advantage Of The Gift Tax Exclusion: You can give up to $15,000 ($30,000 with a married spouse) to as many people as you wish in 2019, free of gift or estate tax. You may want to use the money to fund 529 education accounts. If your state offers a tax benefit, your opportunity to take advantage for this year ends Dec 31.
9. Consider A Roth Conversion: If your income was lower in 2019, if you believe that tax rates are likely to rise in the future, or you want to limit the impact of RMDs in the future because it could negatively impact future taxation of Social Security benefits or increase Medicare costs, you may want to consider converting a traditional IRA into a Roth IRA. Be careful to check out IRS tax brackets, because the amount of money you convert will add to your taxable income. Once you pay the tax due on the conversion amount, the money will grow tax-free in the Roth.