by Kathy Sablone, JD, AEP®, Director of Wealth Planning
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Are you taking advantage of opportunities to lower your tax bill? As many realized last April, the Tax Cuts and Jobs Act of 2017 dramatically changed the tax landscape. You should proactively review your situation to see whether it would be beneficial to act before the end of 2019.
Most income tax strategies revolve around the timing of income and deductions. Although it may not have much of an immediate effect on you if a transaction occurs in December 2019 versus January 2020, it can have a big impact on your tax bill. Typically, you may wish to defer income into the next year and accelerate deductions with prepayments in December to reduce your overall tax for 2019. This may not be advisable if your tax rate will be higher in 2020 than in 2019 (either because you are deferring so much income that you end up in a higher bracket or you are expecting increased income in 2020). In that case, you may wish to accelerate income and defer deductions.
Opportunities to Reduce Income
- Determine whether you can shift the timing of your year-end bonus.
- If you have not maximized your pre-tax retirement contributions, you can contribute up to the limit to reduce your income.
- If you are over 70 1/2 and have not taken your required minimum distribution (“RMD”) for the year, you can make a Qualified Charitable Distribution of up to $100,000. This distribution must go directly to a qualified charity. It counts toward your RMD and is excluded from your income, but you do not receive a charitable income tax deduction for this gift.
- Work with your wealth manager to review your year-to-date gains and losses and decide whether to sell additional stocks to harvest additional gains or losses. As you sell, you and your advisors should be mindful of the “Wash Sale” rule. If you sell a security at a loss and reacquire a “substantially identical” security within 30 days before or after the sale, then the loss is disallowed. If you have multiple accounts with different managers, you can inadvertently trigger this rule. For this reason, it is a good idea to communicate with all of your advisors.
Opportunities to Maximize Deductions
- As a result of the Tax Cuts and Jobs Act of 2017, many taxpayers do not have sufficient deductions to itemize. For 2019, the standard deduction for married filing jointly is $24,400 and $12,200 for single taxpayers or married filing separately. One strategy to maximize deductions to try to exceed these limits is to bunch them in alternating years.
- If your state and local taxes are below the $10,000 deductible limit, you may be able to prepay some of those taxes to use the full amount allowed.
- Medical expenses are only deductible to the extent they exceed 10% of adjusted gross income (“AGI”). If you are close to this limit, you may be able to bunch these expenses together in one year.
- Large charitable contributions can be timed to offset income and can also be accelerated so that multiple years of contributions are made in one tax year.
Year-End Deadlines
In addition to the strategies discussed above, these are some tax-related tasks that must be completed before December 31 in order to either avoid penalties or lose a benefit. The following are some important items to remember:
- For the year that you turn 70 1/2, you have until April 1 of the following year to withdraw your RMD. After that, your RMD must be withdrawn by December 31 of each year. If you fail to withdraw the required amount on time, you will be assessed a penalty of 50% of the amount that should have been withdrawn.
- If you have set aside a Flexible Spending Account (FSA), most plans require that you spend it by December 31 or the funds will revert back to your employer.
- Individuals can make gifts of up to $15,000 per year ($30,000 for couples) to any individual and not be subjected to estate or gift tax. If you do not make gifts this year, this exclusion does not carry over to the next year.
- Although the SECURE Act is still pending passage in Congress, any changes would not be effective for 2019 so no action needs to be taken this year.
Since every situation may be different, please consult with a tax professional before taking any actions.
If you have any questions, please contact our Estate and Financial Planning Group:
Kathy Sablone – [email protected] or 617-956-9712
Alisa Kim O’Neil – [email protected] or 617-275-0313
Important: This article does not contain any legal or tax advice. You should always consult with your attorney, accountant or other professional advisors before changing or implementing any tax, investment or estate planning strategy.
IRS Circular 230 Disclosure: Pursuant to IRS Regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.