Issuing a list of items that are designed to help reduce your tax bill three weeks before the end of the year may appear to be cutting it close, but would you really review a year-end to-review-list in early November? Besides, most of these ideas are ones that can be applied to 2020 as well. Therefore, let’s get to it:
Lowering taxable income for purposes of reducing taxes is the obvious goal in reviewing potential strategies, but there are a couple of other areas where lowering taxable income can have dramatic impact on cash outlays – Medicare B premiums and taxable Social Security benefits. Since Medicare B premiums are based on taxable income from two years earlier, lower taxable income can drop your Medicare B premiums. In addition, individuals who collect benefits before their full retirement age may have their benefits reduced if they continue to work – lowering taxable income may reduce the amount that is deducted from monthly benefits.
- Itemized deductions v. Standard Deduction
The standard deduction is now $12,000 for a single individual, and $24,000 for married individuals filing jointly. The increase has allowed many individuals to reduce the time devoted to gathering and calculating itemized deductions since they are eligible for the higher standard deduction.
Planning Point: Shifting deductions and income between tax years can make a difference in bottom line taxes.
For example, assume a married couple will be buying a new house early next year and their interest deductions alone will exceed $24,000 for 2020. Therefore, since they are already getting the full $24,000 standard deduction in 2019, they may be able to defer certain deductible expenses until 2020 (i.e., charitable donations, medical expenses, large sales-tax items, etc.) which will increase allowable deductions. Deferring income into 2020 may also save overall taxes since the income will be taxed during a year of higher deductions.
- Investment Portfolio’s
Reviewing your taxable (non-qualified) investment accounts may present some tax-saving opportunities. For instance:
Identifying loss holdings and consider selling them to offset any reported capital gains for the year. If there are excess capital losses over capital gains, only $3,000 of the excess is allowed as a deduction each year. But there is no time limitation on how long the loss can carryforward to future years.
Planning point – With the total U.S. Stock Market¹ generating an average return from 2009 through 2018 of 13.95%, it is less likely that portfolios will have large losses, but it may be worth the time to review portfolio.
1CRSP Deciles 1-10 Index provided by the Center for Research in Security Prices, University of Chicago
- Avoid the 3.8% Net Investment Income Tax
Modified AGI’s over $200,000 for single individuals, and $250,000 for married individuals may pay an additional 3.8% tax on their net investment income, such as taxable interest, dividends, gains, passive rents, annuities, and royalties. The tax is due on the lower of net income from investments or the excess of modified AGI over the thresholds.
Planning point: Holding off until after the year to sell capital gain assets may be wise if income in 2020 is expected to be below the thresholds or expected investment income will be lower in 2020. Also, holding off on mutual fund purchases until next year can avoid receiving an unintended capital gain distribution at the end of the year by the mutual fund.
Planning point: Investments that produce tax-exempt such as municipal bonds may lower taxable income – which lowers taxes and possibly Medicare B premiums in the future.
- Take advantage of 20% pass-through income deduction for Real Estate Investment Trusts (REIT's).
The 20% deduction for pass-through income also applies to holders of interest in real estate investment trusts (REIT’s) and public partnerships. Individuals can deduct on their federal return 20% of their qualified REIT dividends.
Planning point: Publicly traded REIT’s are available to purchase through brokerages in the form of mutual funds or ETF’s, which both contain broad diversification and professional management. For example, Vanguard has a REIT available to purchase (VGSIX) that can be reviewed for investment details.
- Charitable donations made directly from a Traditional IRA can save taxes.
Individuals 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. If married, you and your spouse can give up to $100,000 each from your separate IRAs.
- Is it time to consider converting a traditional IRA to a Roth IRA?
You will have to pay tax on the converted funds, but once the money is in the Roth, future earnings are tax free. Present and future tax rates are predominantly the factors that will factor in the decision. If you believe our historically low tax rates will eventually rise, then it may make sense to explore the creation of a Roth IRA that will eventually generate tax-free income resulting in lower taxable income.
- Using the $15,000 Gift Tax Exclusion
You can give up to $15,000 to each person in 2019 without paying gift tax or tapping your lifetime estate and gift tax exemption of $11,400,000. Your spouse can also give $15,000 to the same done in 2019…a $30,000 tax-free gift.
Planning Point: With the current estate tax exemption of over eleven million dollars for each person, it would take 760 years of annual gifts of $15,000 to reach the eleven-million-dollar mark. However, the exemption may always be reduced – remember it was just $675,000 in the year 2002.
- Contribute to 529 plans
Helping your kids or grandkids with their education can be made with up to $75,000 in a single year per beneficiary ($150,000 if your spouse joins in). If you put in the maximum, you’re treated as gifting $15,000 (or $30,000) to that beneficiary in 2019 and in each of the next four years…2020 through 2023.
- 100% Bonus Depreciation
Firms can deduct the full cost of qualifying assets, new or used, with lives of 20 years or less, the they buy and place in service this year. Businesses can also expense up to $1,020,000 of new or used business assets in 2019. Note that the amount expensed can’t exceed the business’s taxable income.
Buying a new or used passenger auto for your business can lead to tax breaks. If bonus depreciation is claimed, the first-year depreciation cap is $18,100 for vehicles put into service this year (purchased after 9/27/17). Buyers of heavy SUV’s used solely for business can write off the full cost, thanks to bonus depreciation. SUV’s must have a gross weight rating over 6,000 pounds. Additionally, up to 100% of the cost of a large pickup truck can be expensed through Section 179.
Tax planning is a critical part of any financial plan - addressing both current taxes and strategies designed to save future taxes. Please review our website to view the types of financial advisory services our firm offers and please contact us to for a no-charge initial consultation.