Wow. Tax season is just on the other side of the holidays. We all know that 2020 will be here in a blink of an eye. Now is the time to make the financial moves necessary to lessen your tax burden. Below are some steps you should consider before the year ends.
Charitable Deductions – The 2019 standard deduction for married taxpayers is $24,400. The cap on state, local and real estate taxes you can take as itemized deductions is $10,000. These two facts mean that a much smaller percentage of the population will itemize their taxes every year.
If you are a giver to charities, bunching your charitable contributions may allow you to itemize in high giving years and take the standard deduction in lower giving years.
You can bunch charitable contributions by giving to your charities every other year or every few years. You could also use a Donor Advised Fund. A DAF allows you to make your contribution in one year (and take the deduction in that year) while deferring the timing of the donations to the charity.
To count on your 2019 taxes, checks to the charity of your choice must be in the mail by year-end. Contributions made on credit cards can be taken in the year you contribute. It does not matter when you pay the credit card bill.
If you can, donate appreciated property to charities. In most cases, you can deduct the full value and you nor the charity pays taxes on the appreciation.
Don’t donate property that has declined in value since you acquired it. You’ll waste the capital loss that way. You are better off selling the asset, claiming the capital loss and then donating the proceeds.
If you are over 70 and a half years old, consider making your charitable contributions from your IRA by making a Qualified Charitable Distribution. A QCD gets the money to your charity of choice, excludes the distribution from taxable income and helps you meet your required minimum distributions.
Medical Expenses – If your medical expenses have topped the 10% of AGI threshold or are getting close to it, consider getting and paying for needed medical expenditures before the year-end.
Home Loan Interest – If you itemize, you can deduct mortgage interest on qualified mortgages up to $750,000 if you incurred the debt after December 15, 2017. Interest paid on mortgages for second homes can be deducted up to the combined $750,000 limit.
You can even prepay your January 2020 mortgage payment in December to add to your deductible interest.
Interest on home equity lines of credit remain deductible only if the loan proceeds are used to “buy, build or substantially improve” the home that secures the loan. Plan accordingly to maximize this deduction.
Tax Arbitrage – A very cool sounding term for taking advantage of lower tax rates by deferring or realizing income when tax rates are lower. Traditional methods of tax arbitrage included deferring tax realization by postponing receipt of income through retirement savings and deferring Social Security and retirement plan distributions. You would only make these deferrals if you believed your income would be taxed at lower rates in the future – like at your retirement.
Tax reform has added a new element to the tax arbitrage discussion. Tax reform temporarily lowered tax rates. The tax rates are scheduled to go back up in 2026. Based on your situation, should you realize more income now at the lower rates before they go back up in 2026?
Retirement Planning – The temporarily lower rates created by tax reform also impacts your retirement planning decisions. Based on your situation, is it better to invest in a Roth IRA and pay taxes now rather than deferring taxes using a traditional IRA? Should you consider converting a traditional IRA to a Roth and incurring the taxes on that conversion while rates are temporarily low?
Child Tax Credit – Tax reform eliminated personal exemptions but doubled the Child Tax Credit to $2,000 for each qualifying child under the age of 17. Planning tip: Social Security Numbers must be issued before the due date of the tax return including extensions. Make sure you have social security numbers on hand for every child you plan to claim the credit for.
529 College Savings Plans – 529 plans have been a great way to prepare for college costs while saving on state taxes. Distributions from 529 plans can also cover up to $10,000 of educational expenses for designated beneficiaries at public, private or religious elementary or secondary schools.
Georgia allows a $4,000 state tax deduction per beneficiary for joint filers and $2,000 for all other filers. 529 plans are a great opportunity to reduce your Georgia taxes while making a lasting difference in the lives of others. In Georgia, you have until April 15, 2020 to make 529 plan contributions that will be deductible in 2019.
Tax Loss or Gain Harvesting – If you have investments with losses that you’d like to sell, you can do so before the end of the year and take those losses on this year’s taxes.
If you have loss carryforwards, you can sell appreciated assets and use the carryforward to offset the gain. You can then buy back the investment and have a stepped-up basis. If you are harvesting losses, wait 30 days before you buy the investment back or you’ll fall under wash sale rules.
Mutual Funds – Be wary of buying mutual funds in your taxable portfolio at the end of the year. If the fund pays a dividend in 2019, you’ll have to pay tax on it and the fund’s share price will decrease by the amount of the dividend. Not fun!
Minimum Distributions – People age 70 and a half years old and older must take minimum distributions out of your IRA accounts before the end of the year or pay a fine equal to 50% of the shortfall! Be sure to make any required minimum distributions before year-end.
Bonuses – If you are fortunate enough to receive a year-end bonus, consider contributing it to your 401(k) or other retirement plan if you haven’t maxed out your contributions. You’ll save on taxes this year and your funds will grow tax-free until you distribute them.
Disclaimer: There are a ton of details and nuances to all this stuff, so please do not consider this column legal or tax advice. Talk to a qualified tax advisor to find out which of these planning opportunities make sense for you and your family.
As always, you can reach me at 229.244.1559 if I can help in any way.
Curt Fowler is President of Fowler & Company and Director at Fowler, Holley, Rambo & Stalvey. He is dedicated to helping leaders build great organizations and better lives for themselves and the people they lead.
Curt is a syndicated business writer, keynote speaker and business advisor. He has an MBA in Strategy and Entrepreneurship from the Kellogg School, is a CPA, and a pretty good guy as defined by his wife and four children.