The tax law changes that went into effect in 2018, changed many things but tax planning moves are still available that can be implemented before the end of the year that can reduce your taxes in 2019. Whether you are self-employed or a W-2 employee, there are strategies available now that can reduce your tax bill if you act before the end of the year.
Five things to consider now
- Defer your income to 2020. If you are a W-2 employee, it may be difficult to postpone your wages until after January 1, but you may be able to defer a year-end bonus. If you are self-employed, you have more leeway. Consider delaying your billings until late in December to push payments into next year. And, whether you are self-employed or not, deferring realizing capital gains until after the first of the year can make sense. Rebalance your portfolio in January, not December! Of course, deferring income only makes sense if you think you will be in the same or a lower tax bracket next year. If you think you’ll be in a higher bracket, you may actually want to accelerate income before the end of the year.
- Maximize your deductions before the end of the year if you are itemizing. The new tax law that went into effect in 2018, dramatically increased the standard deduction amount and limited some deductions previously available. In 2019, the standard deduction is $24,400 if you are married filing jointly and $12,200 if you are filing single. Also, deductibility of state and local taxes is limited to $10,000, meaning that more individuals will likely claim the standard deduction. If you are on the border between itemizing and taking the standard deduction, consider “bunching” your deductions by increasing your charitable deductions and other deductions in 2019 to surpass the standard deduction amount. In alternating years, you could then cut back on these same contributions and take the standard deduction instead.
- Watch out for the alternative minimum tax (AMT). Sometimes accelerating tax deductions can end up costing you money if you are already subject to AMT. The AMT is figured separately from your regular tax liability using different rules and you have to pay whichever tax bill is higher. There is nothing “minimum” about the AMT! Under AMT rules, certain expenses that are ordinarily deductible are not deductible and therefore would not be good candidates for accelerating into 2019. If you have been subject to AMT in the past, coordinate moving deductions into this year with your financial advisor and tax professional.
- Harvest losses before the end of the year. Do you have investments that have losses? If you sell those investments before the end of the year, you can use those losses to offset any gains realized this year. You can also repurchase those investments later if you want to continue to hold them. Remember though that you need to stay out of the investment for 30 days to be able to take the loss. If your losses for 2019 are more than your gains, you can deduct up to $3,000 in excess losses this year and the rest will carry over on your tax return. You can carry these losses forward indefinitely until they are used to offset gains in future years.
- Contribute the maximum amount to retirement plans. It’s never too late to check your retirement plan contributions to make sure they will be maximized by the end of the year. For 2019, you can contribute $19,000 to your company 401(k) plan if you are under 50 and $25,000 if you are 50 or over. If you have a profit-sharing plan on top of that, your limits go to $56,000 if you are under 50 and $62,000 for those 50 and older. If you are self-employed, check with your financial advisor to make sure that the retirement plan you are using allows you to maximize your contributions.
- Make sure to check your flexible spending accounts. If you have a flexible spending account, make sure that you have used the balances that are subject to the “use it or lose it” rule. If your employer has adopted the grace period allowed by the IRS, you actually have up until March 15, 2020 to spend money set aside during 2019. Check to see if your employer has adopted this grace period and if not, make sure to use up the funds in your account before the end of the year by filling prescriptions, seeing your dentist or making other healthcare expenditures.
Of course, what makes sense for you will depend on your personal financial situation. Make sure to contact your financial advisor at Atlanta Financial to discuss what strategies will be most beneficial for you.