Thanksgiving is here and 2020 is right around the corner — there is no better time to consider your year-end tax planning! We don’t have a magic wand, but here are some tried and true tax minimization techniques our clients have found helpful over the years, especially since Tax Reform took effect:
Deferring your income and accelerating expenses.
If you don’t expect to be in a higher tax bracket next year, deferring income into the following tax year and accelerating expenses into the current tax year is a tried-and-true technique. If you’re an independent contractor or other self-employed individual, you may opt to hold off on sending invoices until late December to push the associated income into 2020. However, all taxpayers, regardless of employment status, can defer income apply by taking capital gains after January 1. However, keep in mind that waiting to sell increases the risk that your investment’s value will decrease. Moreover, taxpayers who are eligible for the qualified business income (QBI) deduction for pass-through entities — sole proprietors, partnerships, limited liability companies and S corporations — could end up reducing the size of that deduction if they decrease their income. You may also opt to maximize the QBI deduction, which is scheduled to end after 2025.
Bunching Deductions.
The TCJA substantially boosted the standard deduction for 2019 to be $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, you may find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier. Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. By bunching in one year and taking the standard deduction in an adjacent year, the total deductions over a two year period could be increased. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022.
Bunching Your Donor-Advised Fund.
You can make multiple contributions to it in a single year, accelerating the deduction. Thereafter, you can decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year. If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019). If you want to divest yourself of assets on which you have a loss, instead of donating the asset, sell it to take advantage of the loss and then donate the proceeds.
Bunching Qualified Medical Expenses
Deducting: It’s all about timing. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction.
Bunching Property Tax Payments
Assuming local law permits you to pay in advance, this approach might bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess.
Give to Charity
When considering the amount of your charitable donation, remember that if you receive any benefit from making the donation, you must reduce the amount of your deduction by the fair market value of goods and services received. Several changes to itemized deductions were made under the TCJA. The charitable deduction is still available for the 2019 tax year: gifts or donations of cash to a public charity are deductible up to 60% of your adjusted gross income. Thus a married couple with an adjusted gross income of $200,000 may deduct up to $120,000 of cash contributions to an eligible charitable organization. You can also donate property to charitable organizations. With the donation of appreciated property, the fair market value of the property exceeds the cost basis and you have a choice to utilize either amount when claiming the deduction. When using the fair market value of the property, the maximum amount of the deduction is 30% of your AGI. If you choose to utilize the cost or basis of the donated property, the maximum deduction increases to 50% of your AGI. This is true for donations of appreciated property to private foundations as well, but are limited to 30% when using basis, and 20% when using fair market value.
Loss Harvesting Against Capital Gains
2019 has been a turbulent year for markets and investments. Your portfolio may be ripe for loss harvesting, which is selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.
Maximize Retirement Contributions
Individual taxpayers should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.
Sell Capital Assets
There are currently preferential tax rates applied to gains on the sale of capital assets. For the current tax year, net long-term capital gains are subject to tax at either 0%, 15% or 20% depending on your filing status and taxable income; net short-term gains are taxed as ordinary income. There is also a 3.8% net investment income tax that is applied to gains on the sale of capital assets. If you have net short-term short term and long-term loss carryovers, you can deduct up to $3,000 per year on your return ($1,500 married filing separately). If the capital gains rates move for 2020, it may be prudent to consider selling your stocks and bonds to take advantage of the lower tax rates, and redeploying the gains to achieve the same or better yield.
CONTACT US: There is no time like the present to take advantage of last minute changes that can have a big impact on your 2019 tax bill in April. As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year. If any of these strategies seem right for you, please call us for a complimentary tax consultation, but do it soon. Time is running out. Call toll free: 855-534-2727.
