2019 Year-End Tax Planning Ideas

With the Tax Cuts and Jobs Act of 2017, we all saw our 2018 tax bills change. The biggest change for many is that we lost some of our deductions, while at the same time, the brackets shifted a little (for example, the 15% tax bracket shifted down to 12%, while the 25% bracket shifted down to 22%). Now that we have our 2018 tax returns in hand, reviewing them can lead to ideas that will help save money on your 2019 return. But you must make some of these decisions before year-end; waiting until April 15 is too late.

Tax Brackets

The Tax Cuts and Jobs Act of 2017 moved the tax brackets downward. Yet that change is short-lived and expires in 2025. Thus, over the next six years, there is an opportunity to accelerate income into lower tax brackets than has been the historical norm.

For example, in 2019, the 12% tax bracket for married individuals filing joint returns ends after the first $78,950 of income ($39,475 for unmarried individuals). The 22% bracket then picks up from $78,951 ($39,476 for unmarried individuals) through $168,400 ($84,200 for unmarried individuals). Thus, if taxable income is below one of these thresholds and you anticipate going into a higher tax bracket down the road, it might make sense to accelerate income and fill up a bracket. For many, executing a Roth conversion is the simplest way to accelerate income.

Planning opportunity: Meet with your accountant or financial advisor to discuss filling up lower tax brackets if it makes sense for your situation.

Charitable Giving

Charitable giving has changed for many under the new tax law. If you don’t have itemized deductions of $24,000 (married filing jointly; add $1,300 per person to this as each individual turns 65), then you get the standard deduction of $24,000 ($12,000 if you are filing single; add $1,300 if you are over 65). Since other deductions (like the SALT cap) have been reduced or taken away, it is now harder to hit this number. Thus, timing charitable giving to influence your tax return is more important.

For example, a married couple with $15,000 of real estate and state income taxes is now capped at deducting only $10,000 of that. Assume that they have no medical expenses to deduct and that their deductible interest on their mortgage is $8,000. In this scenario, if they gave $3,000 to charity, they would see no effect on their tax return because they fall below the $24,000 standard deduction ($10,000 + $8,000 + $3,000 = $21,000).

The better answer for this couple would be to bunch their charitable deduction into one year, giving multiple years at once and then skipping for a few years, until they want to do this again. One way to use this strategy is through donor-advised funds (DAFs). With a DAF, you can give larger chunks away today and get the tax deduction, but you hand the money out on the back end as fast or as slow as you want.

In our example above, it could make sense for the couple to give away three to five years of donations ($9,000–$15,000) to the DAF since that would elevate their deductions above the standard deduction. Of course, this strategy would make sense only if you have charitable intent.

One more caveat about charitable giving if you are over age 70 ½: At that age, you must start taking required minimum distributions (RMDs) from your IRAs. You can, however, give away your RMD (up to $100,000) to charity and have it count toward your RMD for that year. Because it was given to charity, you do not have taxable income on your tax return for this amount.

Note that the gift must be given directly to charitable organizations and cannot be given to DAFs or private foundations. Also, keep in mind that you don’t get a charitable deduction since you were never taxed on this income in the first place. The benefit is never being taxed on the income, which will help your overall tax return. This strategy is not reliant on whether you hit the standard deduction.

Planning opportunity: Meet with your accountant or financial advisor to look at how charitable giving can impact your return. Consider whether marrying the charitable strategy with the tax-bracket strategy (i.e., Roth conversion) helps you accomplish several goals at once.

Look Under the Hood of Your Portfolio

Review your portfolio to determine if you had any losses that you can use to offset gains. In addition, review your mutual fund distributions to see if they will be considered short term (taxed more heavily) or long term (taxed less heavily). Then consider if it makes more sense to sell the mutual fund and pay taxes on your gains than paying taxes on the distributions.

While you are reviewing your mutual funds, look them up on www.morningstar.com. Funds with higher turnover should go in tax-deferred accounts such as IRAs since these funds tend to make more taxable distributions each year. And if you are investing in fixed income (e.g., bonds or CDs), consider whether it makes more sense to use municipal bonds for more tax-free income.

Planning opportunity: Investigate the structure of your portfolio to see how it is affecting your tax return each year.

Health Savings Account (HSA)

I have written a lot about why I like HSAs as savings vehicles for health spending later in life. But one thing that gets missed often is how to maximize the savings. In 2019, you can contribute $3,500 for an individual or $7,000 for a family. But if you are over age 55, you can contribute an extra $1,000 per year, per person. Note that you can contribute the full $1,000 in the calendar year you turn 55 (this is not prorated by the number of months you were 55 that year).

The issue here is in the words “per person.” While you might have a family HSA account in the name of the spouse whose work is sponsoring the plan, the other spouse (working in or out of the home) cannot contribute to that account the extra $1,000 catch-up contribution if they are over age 55. They must set up a separate account under their name to do that.

Planning opportunity: Call your HSA provider to make sure the appropriate accounts are open to contributing the maximum allowable if you or your spouse are over age 55.

Act Now

This list is not exhaustive of all the tax planning opportunities. Tax planning is one of the most essential steps you can take in later November and early December to help yourself. This is especially true if you have anything unique going on in 2019 (like a business sale, retirement, or divorce) that might present opportunities.

If you have questions or would like to learn more, contact Jon Meyer at jmeyer@bgmwealth.com.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.