TURKEY TIME TAX PLANNING:
The proverbial sweet tooth has had a good run, but with our Halloween candy collections dwindling to circus peanuts and raisins, one might find it easy to despair. But not so fast! Suffering through our leasft favorite candy means Thanksgiving is on the horizon, and my year-round enthusiasm for mashed potatoes and tax planning will soon be shared by all. November can be the ideal month for tax planning. With an estimate of our annual income, we still have time to manipulate 2019 taxable income to make our dollars go further. Let’s have a look at what should be on your radar as we approach the end of 2019.
2019 contributions to IRAs, HSAs and 529 plans can be made until April 15, 2020, but retirement planners aren’t completely off the hook for year end. Required Minimum Distributions (RMDs), Roth IRA conversions, capital gain/loss harvesting and many other strategies must be completed by December 31 to count for 2019.
If you are over 70 ½ years old and charitably minded, consider making a Qualified Charitable Distribution (QCD) from your traditional IRA directly to your favorite charity. This method directly reduces Adjusted Gross Income (AGI), allowing a tax benefit even for those who use the standard deduction. With only about 10% of taxpayers itemizing their deductions under the new tax act, many are finding that QCDs are the best way to maximize their charitable impact.
If you are a business owner who had a big 2019, consider how fast-tracking that equipment purchase might reduce your 2019 tax liability and give you a head start on an even bigger 2020. A new retirement plan for your business might allow you to save more in a tax-advantaged account. If considering a change before year end, keep in mind that while 2019 SEP-IRA contributions can be made in 2020, 401(k) contributions must be made by December 31.
Tax planners usually talk about reducing taxable income, with good reason, but one may also benefit from taking on some discretionary income to create future tax savings. If your income in 2019 was lower than normal, consider converting funds from a traditional IRA to a Roth IRA. Roth conversions are included in taxable income now but can create net tax savings if you find yourself in a higher tax bracket in the future.
Whereas capital loss harvesting typically involves selling stock at a loss to reduce taxable income, capital gain harvesting is another way in which some taxpayers may recognize discretionary income to provide a tax benefit. Individuals with under $50,000 in gross income (or married joint filers under $100,000) may have an opportunity to sell appreciated stock without paying federal capital gains tax (but don’t forget about state taxes, especially if you live in Oregon). In either case, the cash from the stock sale may then be used for additional tax savings, perhaps by increasing contributions to a retirement account or reinvesting in a taxable investment account at a higher cost basis.
On the other hand, higher income taxpayers with substantial charity budgets may benefit from donating appreciated stock rather than selling it. The stock donor avoids capital gains tax and receives a charitable deduction for the value of the stock. Other assets such as mutual funds and real estate may also be used for harvesting and giving strategies.
December is the most popular month for charitable giving in the United States. Perhaps many of us are hoping a charitable gift will get us on Santa’s “nice list.” But if you are looking for a tax deduction, you might be better off waiting until January. By “bunching” two years of donations into one, you may be able to use the standard deduction in one year, then itemize the next to maximize your combined deductions. If Santa still snubs you despite your generosity, you can use your tax savings to fund your own “nice list” and treat yourself to all those silly socks you’ve been wanting.
There are seemingly countless tax planning strategies, and this is certainly not an exhaustive list. Now is a great time to ask yourself and your advisors, “What are we doing to minimize my tax liability? And, how does that fit into my overall financial plan?” We are here to help.
Please confirm any gifting or tax planning instructions with us no later than December 1st. After that date, we cannot assure that transactions will be completed prior to year-end.