Year-End Tax Moves To Consider

2019 has sure flown by! We're on the cusp of another tax season, so we wanted to be sure to get you some planning moves before this year comes to a close.....

Retirement Plan Contributions
Direct surplus funds into pre-tax accounts, such as 401k’s and Traditional IRA’s. Or, if you feel your future income and corresponding tax rates will be higher, consider contributing to a Roth IRA. Employee 401k contributions must be made by year-end. While IRA contributions can be made up to the filing due date of 2019 returns (April 15, 2020). Be sure of your eligibility for contributing to IRA’s before forking over your funds. It’s often best to wait until your draft tax return is prepared so you can see the impact of IRA moves. Here are more details on each of these types of accounts - click here.
 
Recordkeeping
Remember, CA & many states never conformed to many of the IRS tax reform changes. Many state returns will still have differences from the IRS. So it’s important to continue maintaining all records to ensure we have all data necessary for an accurate state return. Just because the IRS eliminated certain deductions doesn’t mean we can’t still take those deductions with the states (i.e. – unreimbursed employee expenses).
 
”Other Dependent” Credit
Kids aren’t the only dependents you can claim on your return for a tax credit. If you provide at least half the support for someone who’s not your qualifying child, you may be able to claim a $500 “other dependent” credit for this person. So it’s advisable to ensure this dependent’s adjusted gross income does not exceed $4,200 for the year, as that’s a requirement to take this credit.
 
Health Savings Accounts (HSA)
If you have a high deductible health plan, consider maximizing your HSA contributions. HSA’s are not only a great way to pay for current medical expenses, but we also love the strategy of investing HSA funds for future health costs. This allows the account to take advantage of the triple tax benefit (check out point #2 at this link).
 
Flex Spending Accounts (FSA)
Be sure to have no more than a $500 account balance at year end in any health flex spending accounts at work (FSA). Check with your employer regarding carryover of funds if your balance exceeds thresholds to ensure funds aren’t forfeited.

Small Businesses
Small business owners should be in contact with their tax preparer to discuss monitoring income levels, in order to ensure the ability to obtain the new 20% business deduction (phaseouts begin at $315,000 taxable income and must not exceed $415,000 for married joint filers to get any deduction…$157,500 phaseout and $207,500 limit for others). Other restrictions apply.

Gifts to Individuals
If planning to give money in excess of $15,000 to family members, friends, etc., be sure to give $15,000 prior to year-end to avoid gift tax return filing requirement. An additional $15,000 can then be given for the 2020 tax year on January 1, allowing for $30,000 to effectively be given to any individual in a two-day period. Married couples can double this amount since the $15,000 annual limit applies to each giving spouse. Here’s more on gifts.

Roth IRA Conversions
Consider converting Traditional IRA funds over to a Roth IRA, if your marginal tax rate is lower now under tax reform than expected later during retirement years (not recommended if current tax rate is 22%). Remember, a Roth Conversion will hit you with taxes now, but the converted funds will then grow and distribute tax free. It’s also advisable to pay the taxes with savings, if you have sufficient funds. This allows for more money to be in the new Roth investment.

Capital Gains Strategy
Capital gains with the IRS are taxed at 0%, 15%, or 20% (possibly even 33.8% for high income folks). If you’re in a low income year, you may want to sell enough securities at a gain to still keep you in the 0% capital gain bracket for those security sales. This a way to pay no IRS taxes on your non-qualified investments. NOTE: many states tax capital gains at ordinary income rates. So this generally only applies to IRS strategy. The threshold for joint filers to stay in this 0% IRS capital gains bracket is $78,750 taxable income. So if you have $58,000 taxable before sales of securities, you could have gains of $20,000 and pay $0 tax to the IRS.
 
Bunching
With tax reform doubling the standard deduction in 2017, many taxpayers are on the cusp of either taking the standard deduction, or itemizing deductions. For those who make charitable donations, itemizing is important to get a net benefit. One could employ a donor advised fund strategy. This allows for a large donation to be itemized in one tax year, without having to deploy the funds immediately. Rather, with this fund, the monies can be disbursed to the taxpayer’s chosen charity over the coming years. Then the taxpayer would just take the standard deduction in those subsequent years, after receiving the full benefit of their donation upfront in the itemizing year.
 
As with most tax strategies, each situation should be looked at individually. Feel free to contact us with questions…we’re happy to help!