Top 10 Year-End Tax Tips
By: Patrick Cote
That time of year again! While we are in the midst of holiday season, the last thing many of us want to do is sit down and think about taxes. However, taking a few minutes to focus on some specific areas can make a big difference.
With that in mind, we prepared a list of 10 key items to focus on before 12/31:
1. Donate appreciated assets
With the stock market way up significantly this year, you may be sitting on large capital gains. If you are planning to make charitable contributions, you can help your preferred charities even more if you donate appreciated assets from a taxable brokerage account, as long as you have held the assets for more than one year.
2. QCDs (Qualified Charitable Donations)
Similarly to #1 above, you can make a contribution to your preferred charities directly from your IRA if you are age 70½ or older. The nice part about this strategy is that the distributions can be excluded from your taxable income and still count towards your RMD (required minimum distribution).
3. Set up a donor-advised fund
As Kate’s article mentions this month, donor-advised funds are a great way to be generous with charitable donations, while receiving the tax benefits immediately. The contributions to the fund need to be made by 12/31 to apply to 2019 income taxes. This is closely related to charitable bunching, which involves making multiple years of charitable contributions in a single tax year.
4. Make a 529 contribution for your kids or grandkids
The contributions can be up to $15K per donor per beneficiary. In other words, two parents can contribute $30K for child #1, $30K for child #2 and so on. Over 30 states and the District of Columbia offer a state income tax deduction or credit for 529 deductions, so it pays to know what you are eligible to receive.
5. Plan out any other significant gifts you would like to give
The annual gift tax exclusion is $15K per recipient in 2019, or $30K per recipient from a married couple. The 529 contributions count as gifts, although you can make other gifts to other family members or loved ones as well. These gifts need to be made by 12/31.
6. Take any RMDs (Required Minimum Distributions)
If you have inherited an IRA or you are over age 70½, it is very important to make sure you take your RMDs. The tax penalty for missing a RMD is 50%.
7. Tax-Loss Harvesting
The good news is that with the stock market gains this year, many stock investments have unrealized capital gains. If you do have some investments that have unrealized capital losses in a taxable brokerage account, this could be a good year to realize those losses. You can deduct up to $3K in capital losses each year. The good news is that you can deduct those losses even if you do not itemize your deductions (with the higher standard deduction, most people do not itemize any more).
8. Roth IRA conversion
If your 2019 taxable income is lower than it would typically be for you (e.g., if you were not working for a large part of the year), this might be a good year to convert your traditional/rollover IRA to a Roth IRA. You will be able to take advantage of the lower tax rates that apply to lower taxable income.
9. Maximize your 401K contributions, especially for employer match
It is quite late to make adjustments for your 2019 401K contributions, however it is important to make sure that you don’t leave any money on the table. Employer matches are a great way to make instant returns, often of 50% or 100%, for your contributions. You will want to make sure that you contribute at least up until the maximum your employer will match, often 4% to 6% of your pay. This may need to go into 2020 if your employer cannot adjust your contributions for the last two weeks of 2019.
10. Open a retirement account for your small business
You can make many contributions for the 2019 tax year up until when you file your 2019 income tax returns in 2020, including for IRAs. However, if you would like to make a defined benefit plan or cash balance plan contribution, the plans need to be set up by 12/31/2019. This is really important for small business owners that need to bring down their 2019 taxable income to qualify for the 20% QBI (Qualified Business Income) deduction. If you have an S corporation or LLC and your taxable income is anywhere from $400K to $600K, this could apply to you.