As the year draws to a close, you may be wondering if you’ve done enough to reduce your overall tax obligations for 2019 and whether there are any additional steps you can take to improve your position to avoid a tax bill later.
There are always things you can do to improve your tax position at year-end and in the beginning of the new year, and in this article we’ve compiled a list of recommendations from various CPA tax experts.
Also, since this is the second full year after the tax legislation that was signed into law at the end of 2017, it’s a good time to understand the changes that may affect you the most.
Move funds to IRAs, health savings accounts
You can contribute to your individual retirement account, if it’s a traditional IRA, up until April 15, 2020.
But, if you want to make additional transfers to your 401(k) plan, you have to do so before the end of the year. The contribution cap for a 401(k) plan is $19,000 in 2019. If you are 50 years or older, you are entitled to make an additional $6,000 in catch-up payments.
Also, health savings accounts are the new way to save for future medical expenses. If you have a qualified high-deductible family health plan, you can contribute up to $7,000 a year ($3,500 for an individual).
Those contributions can be itemized as a deduction to your income on your tax forms. Most people with employer-sponsored health plans with attached HSAs usually have their contributions transferred on a pre-tax basis.
Itemizing
When you itemize, you only want to do so if your itemized deductions will exceed the standard deduction that you are entitled to, which for the 2019 tax year is $24,400 for married couples and $12,200 for single filers.
Additionally, the 2017 law capped at $10,000 how much you can deduct from your federal taxes that you paid out for property, state and local income taxes. Sit down with your tax specialist to see which route is best for you.
Make tax-free gifts
You can get ahead of the curve by gifting money to dependents. The IRS code is generous, allowing people to give up to $15,000 a year to family members. Your estate does not pay estate taxes on the gift and the recipient does not pay income taxes on the gift.
The federal lifetime estate and gift tax exemption for 2019 is $11.4 million per adult ($22.8 million for married couples), thanks to the 2017 tax law, which doubled earlier levels. If you have not done so, you should see if you need to update your estate plan.
Balancing capital gains
Some financial planning experts say you should consider selling some underperforming or money-losing investments, in order to help show an investment loss or reduce other capital gains you enjoyed from selling more buoyant securities.
And if you generate more losses than capital gains, you can usually deduct up to $3,000 in capital losses if married and $1,500 if you are single or married and filing separately. If your losses are greater than the cap, you can carry them forward to future years.
For capital gains taxes, here’s how the tax table breaks down:
- Singles earning up to $39,375, and married couples filing jointly and earning $78,750 or less: 0%
- Singles earning between $39,376 and $434,550, and married couples filing jointly and earning between $78,751 and $488,850: 15%
- Singles earning more than $434,550, and married couples filing jointly and earning more than $488,850: 20%
Sock education funds away
Another place to funnel some of your money to reduce your overall taxes is into a 529 education savings plan account. You can deposit up to $15,000 per beneficiary (double if married and split gifts) every year.
Converting IRAs
Many tax advisors are recommending that people consider converting traditional IRAs into Roth accounts. Under traditional IRAs, you pay taxes on the funds you remove from the account after you retire, but you add funds with tax-free dollars.
With Roth IRAs, you fund the account with already-taxed income, but withdraw funds later on a tax-free basis.
Depending upon your financial situation, it could be wise to convert your traditional IRA and pay taxes now on the conversion, rather than holding the funds in the traditional IRA and paying taxes upon distribution at a later date.
Jay is a graduate of the University of Pennsylvania School of Dental Medicine and also has an MBA from San Francisco State University. He has worked for a number of insurance carriers and brokers over the past 25 years. At UBF, Jay specializes in advocating for our clients in various issues, including grievances, benefit inquiries and eligibility issues.
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