Year-End Tax Planning Ideas to Generate Potential Tax Savings
By Lynn A. Ferraina
Maximizing Your Retirement Savings for This Year
You can contribute up to $19,000 to your employer 401(k), 403(b), or Federal Thrift Savings Plan for 2019 plus $6000 in catch up contributions if you are age 50 or older. Pre-tax contributions will lower your take-home pay and could reduce your tax bill. If your employer offers a Roth 401(k), you can make contributions that won’t lower your taxable income but can be withdrawn in retirement tax-free. If you are self-employed or have freelance income, consider a Solo 401k plan. It must be opened by 12/31, but it can be funded up to April 15, 2020. You can contribute up to $19,000 ($25,000 if you are 50 or older) minus any contributions you’ve made to a 9-5 employer’s 401(k) plan for the year. As a self-employed individual, you can make employee and employer contributions up to 20 percent. You can contribute up to 20 percent of your net self-employment income to the plan. Contributions to the Solo 401(k) can total $56,000 in 2019 (or $62,000 if 50 or older), but they cannot exceed your self-employment income for the year.
Another option is to open a Simplified Employee Pension (SEP account). However, if you have a small amount of freelance income, you can contribute more to a solo 401(k). SEP contributions are limited to 20 percent of net self-employment income, up to $56,000.
Transfer IRA Funds to Charity
Taxpayers who are 70 ½ or older can transfer up to $100,000 from a Traditional IRA tax-free to charity as long as the funds transfer directly to the charity. This is called a “qualified charitable distribution”. The distribution can count as your required minimum distribution without being added to your adjusted gross income. This could be advantageous if you are taking the standard deduction instead of itemizing. The transfer to charity could also help keep your income below the threshold at which you are subject to Medicare high-income surcharges as well as limit the percentage of your social security benefits subject to tax. Make your QCD well in advance of year-end because the money has to be out of your IRA and the check cashed through the charity by 12/31.
Offset Capital Gains
Reviewing capital gains to losses is a standard practice to help reduce taxes but with 2019 being an exceptional stock market growth year it may be harder to find losses to offset gains. If you are in the 22 percent or higher tax bracket, tax-loss harvesting may make sense. You can harvest losses in excess of gains. Losses not used in 2019 can be carried forward indefinitely for federal tax purposes.
There is a long term capital gains tax rate of 0 percent in the two lowest (10 and 12 percent) marginal tax brackets. If your projected taxable income is less than $39,475 for single filers and $78,950 for married filing jointly you may want to recognize long term gains, which could be taxed at a 0 percent Federal tax rate. Check with your tax accountant for your specific tax planning situation.
Consider Your Tax Deduction Options
Review your itemized deductions, as results for the 2018 tax filing season indicated the number of taxpayers itemizing was greatly decreased because the state and local taxes (SALT) had been limited to $10,000 for married and single filers. To itemize, you have to exceed the standard deduction, which is $12,200 for a single filer and $24,400 for married filing jointly. Given this significant change, the key to itemizing could be charitable contributions. Consider gifting appreciated securities instead of cash to charity. An example could be gifting a stock with a current value of $5,000 that you paid $1,000 to purchase. This could save $952 in tax ($4,000 x 23.8 percent). Plus, you still receive a charitable contribution deduction. The top marginal tax bracket’s federal long term capital gains rate is 23.8 percent.
As with all financial planning decisions, contact your CAS Advisor to help you work through your choices.
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