Atlanta Financial Newsroom
9 Year-End Tax Tips
November 13, 2019
This year marks our second year living with the sweeping tax law changes passed at the end of 2017, known as the Tax Cuts and Jobs Act. How did you fare under the new tax law, or do you know?
Many tax payers had pleasant surprises when they filed their 2018 returns, with smaller tax bills and/or larger refunds than usual. But some tax payers felt like they didn’t benefit from the tax cuts at all. As we met with clients in 2019, we found that for some of those clients the total tax paid was in fact higher, but due to higher income levels (from a strong economy and stock market), while tax rates actually did decline from pre-2018 levels. Unfortunately, for a significant minority of our clients, both rates and taxes paid were higher due to limitations on mortgage interest deductions, the elimination of personal exemptions and the cap on state and local tax deductions (the so called “SALT” deductions).
Regardless of which camp you found yourself in after filing your 2018 taxes, there is still time to minimize what you will owe for 2019 with smart planning. We have listed below 9 tips to consider between now and year-end.
- To itemize or not?
Just as in 2018, the new law greatly increases the standard deduction, with the 2019 limits rising to $24,400 for married couples filing jointly and $12,200 for single filers. At the same time, many items that previously could be deducted have been reduced. The law placed new limits on itemized deductions, including a $10,000 cap on property and state and local income tax deductions. In addition, mortgage interest on loans in excess of $750,000 is no longer deductible. However, the first $1 million of your mortgage debt (including home equity loan balances) for your primary home or a second home is still deductible if in place prior to Dec. 15, 2017. Miscellaneous itemized deductions were completely eliminated and the threshold for deducting total unreimbursed allowable medical care expenses was raised from 7.5% to 10% of your adjusted gross income. The net result of all these changes is that for many taxpayers, using the standard deduction is now much more beneficial than itemizing. If you determine that itemizing deductions won’t be the best option for you for 2019, you may want to reconsider some common year-end tax moves. For example, paying any state income taxes due before year-end may no longer be beneficial. And tax deductions from cash and non-cash charitable donations may be lost. Consult your financial advisor and tax advisor to discuss your specific situation.
- If over 70 ½, consider whether a Qualified Charitable Distribution is right for you
Even if you are no longer itemizing, there is still one way your charitable contributions can still benefit you at tax time. The law continues to allow tax payers to make a distribution directly from their IRA to a qualified charity in an amount up to $100,000 per taxpayer. If you have charitable obligations and must take a Required Minimum Distribution from your IRA, using your IRA to fund those charitable donations can be a win-win. The amount distributed directly from your IRA won’t show up on your tax return, which can reduce taxation on your Social Security benefits, income thresholds for medical expense deduction and/or Medicare premium surcharges. In the past, gifting from the IRA may have only made sense for larger gifts due to complications with operational processes and tax reporting. However, starting this year, Schwab has made available a checkbook on IRA’s to use for even smaller dollar contribution amounts. See your advisor to discuss if this tax move might make sense for you.
- Consider gifting appreciated securities
How can you make tax-smart gifts to charity if you are under 70 ½? If you have highly appreciated stocks or mutual funds, consider using those as a source of your gifts. Rather than realizing those gains on your own return, use the appreciated shares to fulfill your yearly charitable obligations and replenish the donated funds in your portfolio with cash from savings/earnings for the year.
- Fully fund your retirement plan(s)
With a month or two left in the year, it’s not too late for this strategy to pay off. If you aren’t on track to contribute the maximum allowed to your 401(k), IRA, or other retirement, consider increasing contributions between now and the allowed deadline.
You generally have until Dec. 31, 2019, to contribute to a 401(k) plan and until April 15, 2020, to contribute to an IRA for the 2019 tax year.
- If 2019 is a no income or low-income year, consider converting some of your traditional IRA to a Roth IRA
Depending upon your particular situation, it could be beneficial to convert some or all of your traditional IRA to a Roth IRA. Why? Unlike with a traditional IRA, qualified distributions from a Roth IRA aren’t generally subject to federal income taxes, as long as the Roth IRA has been open at least five years and you have reached at least age 59½. But in the year that you convert from the traditional to the Roth, you will have to pay taxes on the amount of your deductible contributions, as well as any associated earnings. So, this tax move makes the most sense in a low-income year, or even better, one where no income taxes are due at all. If you wonder if this might work for you, discuss this tactic with your financial advisor and/or tax advisor.
- Can you pay any health care costs with pre-tax dollars?
Both Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) could allow you to sock away pretax contributions for qualified medical expenses your insurance doesn’t cover.
But there are key differences to these accounts. To qualify for an HSA, you must purchase a high deductible health insurance plan and you cannot have “disqualifying additional medical coverage,” such as a general purpose FSA. You can read more about HSA’s in my recent article, “Is a Health Savings Account (HSA) Right for Me?”
One important benefit of HSAs is that unlike an FSA, you don’t have to spend all the money in your account each year. Though some employers allow you to roll over as much as $500 in FSA funds from year to year, generally, the funds you contribute to an FSA must be spent during the same plan year.
Be sure to check your employer’s rules for FSA accounts. If you have a balance, now is a great time to make sure you take full advantage of the balance of the account. Determine if any can be carried forward and if not, plan optional procedures this year rather than waiting until 2020.
Finally, keep great records of all your health care expenses. Beginning Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of your adjusted gross income.
- Consider year-end tax loss harvesting and/or tax “avoidance”
As your financial advisors, when we near each year-end, – we spend a great deal of time looking for ways we can increase your after-tax returns. First, we consider whether clients are holding investments with tax losses due to market timing or underperformance of a particular investment or market sector. If so, it can be a good time to generate a capital loss before the end of the year — which could help offset the capital gains from sales or mutual fund distributions in the current or future years. Note that under the new law, investors will continue to pay long-term capital gains taxes at a rate of 0%, 15% or 20% (depending on their overall income), but with adjusted cutoffs. Married couples filing jointly and earning $78,750 or less ($39,375 or less for singles) will pay 0%. Married couples filing jointly earning between $78,715 and $488,850 (or $39,376 and $434,550 for singles) will pay 15%, while married couples filing jointly and earning more than $488,850 ($434,550 for singles) will pay 20%.
Next, we look for opportunities for “tax avoidance planning.” Examples include situations where clients have investments that will have unusually large year-end capital gain distributions. If a specific investor’s gain is smaller than the gain that will be distributed, the gain will in effect create “phantom taxation.” If significant enough, it may make sense to sell the investment in advance of the distribution, later moving back into the preferred or a similar investment.
If you have portions of your portfolio you are managing yourself and would like our assistance with this sort of tax-sensitive management, please contact your advisor today.
- Fund a 529 education savings plan
Putting money into a 529 education savings plan account is one way you can make a tax-free gift to a beneficiary. Investments inside the 529 plan grow tax-deferred and distributions are tax-free if used for qualified education expenses. Generally, you can make a gift of up to $15,000 per beneficiary annually ($30,000 from a married couple electing to split gifts) without having to fill out the federal gift tax form. You may also be able to contribute up to five years’ worth of gifts ($150,000 from a married couple electing to split gifts) per beneficiary in one year, as long as no other gifts are made over that period.
Under the new tax laws, 529’s may also be used to pay up to $10,000 of tuition annually for the beneficiary’s enrollment or attendance at a public, private or religious elementary or secondary school, free from federal income taxes. However, the longer the funds stay invested in the plan, the more powerful the tax savings become.
- Make tax-free gifts
For those fortunate enough to have accumulated sizable estates, gifts made during your lifetime can avoid estate taxes. First, it’s important to know that the lifetime federal gift and estate tax exemption has more than doubled to $11.40 million for individuals ($22.80 million for married couples), meaning far fewer estates will owe estate tax. However, if you still want to make gifts during your lifetime, you should be aware that you can give as many family members, friends or even strangers as you like up to $15,000 per year per recipient ($30,000 from a married couple electing to split gifts) without reporting it to the IRS. Generally, once the gift is made, your estate will not pay estate taxes on it, and it will not be considered taxable income for the recipient.
Before we know it, the holidays will be over and 2020 will be upon us. If you weren’t happy with the taxes you owed in 2018, it’s not too late to take one or more of the actions listed above. Please reach out to our team at AFA with any questions or to get additional guidance about which step or steps have the biggest impact for you.
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. With all of the discussion in the news around the political uncertainty, impeachment, and the looming trade war, one of the largest changes to retirement savings laws in recent years was passed with very little fanfare. However, some of the changes will be significant. I have tried to highlight what may impact the majority of our clients and readers.
The Act has a lot of positives such as simplifying rules and making 401k plans potentially available to more workers, pushing back the RMD age, and allowing contributions to IRAs past age 70. The negative impact I see is the elimination of the stretch IRA which is a clear move by the government to raise tax revenues by forcing money out of inherited IRAs sooner. I will discuss in more detail below, but this should be a time to review beneficiaries and discuss whether any change in your legacy planning should be made in response to the new laws. What do you need to pay attention to?
Recently, my husband and I took care of our 12-month old granddaughter while our daughter and son-in-law took a much-needed vacation together. When they dropped her off, their parting words were, “She is almost ready to walk, but make sure she waits until we get home!”
Famous last words… Of course, as soon as they left the house, she was trying to walk – literally everywhere. And after about 24 hours she was taking her first baby steps. By the time they arrived back three days later, she was walking (a little unsteadily but walking none-the-less) and was very proud of herself. Great strides in just a few days but predicated on all of the trial and error and lessons learned in the months before.
Financial planning is a little like this. You’ll make mistakes along the way – everyone does. But you will do a lot of things right as well and the important thing to remember is that your financial health is based on doing the little things right, all along the way.
So, what should you be doing when you are 22, 52 or 72? Here are three important tips for each decade.
Cathy Miller Receives the Women’s Choice Award® as Highly Recommended Financial Advisor by Women for Women for Seventh Consecutive Year
Atlanta – November 19, 2019 – Atlanta Financial Associates, an independent financial advisory firm, recently announced that Cathy Miller, MBA, CFP® , CRPS®, CDFA™, has received the Women’s Choice Award® for Financial Advisors and Firms.
As the leading advocate for female consumers, WomenCertified Inc. selected Miller based on rigorous research and specific objective criteria; she has received this recognition every year since 2013.