Year-end Tax Planning
Tips and strategies that could save you money
The tax planning landscape changed in 2017 with the passing of the Tax Cuts and Jobs Act. Changes included a nearly doubled standard deduction, repeals on many itemized deductions, reforms to several other provisions, and deductions for state and local income taxes and property taxes capped at $10,000.
It’s important to know if you should take the standard deduction before any year-end spending that generates itemized deductions, such as charitable gifts or elective health care procedures. If you don’t itemize, you won’t get additional tax deductions for these items.
If you’re close to the standard deduction, consider shifting deductions and combining them into one tax year. For example, if you take the standard deduction in 2019, move 2019 year-end charitable gifts to early 2020. By making your 2019 and 2020 charitable gifts in 2020, you can itemize your deductions in 2020. The same planning can be implemented for tax payments (state ES payments and property taxes), assuming you are under the $10,000 threshold, as well as for elective health care procedures and other deductible expenses.
Accelerate Medical Expenses
2018 was the last year for a lower threshold of medical expenses. In 2019, the threshold for medical expenses increased to 10% (from 7.5%) of adjusted gross income. If you’re itemizing and are close or know of upcoming medical procedures, you may want to either accelerate your medical transactions and purchases in 2019 or defer both years until 2020, if you believe you will meet 10% by combining the two years.
Donate Appreciated Securities to Charity
If you’ve already planned charitable contributions, donating appreciated securities instead of cash doubles the benefit. When donating stock with long-term capital gains, you get the full charitable deduction without paying tax on the realized capital gains from the stock appreciation. The cash you were going to donate can be used to repurchase the security donated, which resets your cost basis.
Maximize Your Retirement Accounts
For 2019, you can make contributions to your 401(k) up to $19,000 generally and $25,000 if you are over age 50. In 2020 those contributions will go to $19,500 generally and $26,000 if you are over age 50, so you’ll want to adjust your deferrals appropriately at the beginning of 2020 to maximize evenly throughout the year.
Qualified Charitable Distributions from your IRA Required Minimum Distributions
Once you hit age 70½, you have to take required minimum distributions (RMDs) out of IRAs and other retirement plans. (Distributions are taxed at ordinary income tax rates, and they do not need to be taken from a Roth IRA.) Rather than making a taxable distribution, you can make a Qualified Charitable Distribution (QCD), which allows you to distribute up to $100k from an IRA directly to a qualified charity.
These distributions are excluded from income but count toward your annual RMD requirements. Because the distributions aren’t from income, you can’t claim a charitable deduction. This strategy works best if you don’t need cash from the RMD. If you do need cash flow from your RMD, gifting low basis securities may be more tax efficient. Gifting securities also allows you to get a tax benefit, provided you don’t itemize.
Paying Estimated Taxes from IRA RMD
Some people have a hard time remembering to pay quarterly estimated taxes. One way to address this is to have all of your RMD go to federal and state estimated taxes at year-end. The IRS views the payment as if it was made throughout the year, so you avoid an underpayment penalty. So, if you notice that your RMD is approximately equal to your estimated tax payments, you could get extra deferral in your portfolio and not make your quarterly tax payment until December.
Harvest Capital Losses (or Gains)
It’s never fun when the stock market goes down, but there is a small silver lining: harvesting capital losses. Tax-loss harvesting is selling a security that has experienced a loss and using the proceeds to buy a similar security that maintains your market exposure. This loss now becomes an asset that can offset current or future gains in the portfolio. Versant Capital Management continuously monitors opportunities to harvest losses for all of our clients.
Conversely, people in the lowest tax brackets should consider harvesting long-term capital gains because they may be eligible for the 0% long-term capital gains rate (based on federal taxable income). As a result, you can sell the security and immediately repurchase it to maintain your market exposure. You’ve now reset your cost basis without triggering any taxable gains!
Utilize State Charitable Tax Credits
Many states offer tax benefits for contributions to education, low-income residents, chronically ill or disabled children, foster children, and the military. Arizona has several tax credits which you can take advantage of through April 15, 2020 while still being applied to your 2019 tax return, including the following:
- Private School Tuition organizations up to $1,138 married filing jointly (MFJ) and $569 for all other filers.
- PLUS “Switcher” Tax Credit Program allows an additional $1,131 MFJ and $566 for all other filers after maximizing the Private School Tuition Credit.
- Public Schools up to $400 MFJ and $ 200 for all other filers.
- Charities that aid the working poor up to $800 MFJ and $400 for all other filers.
- Qualifying Foster Care Charitable Organizations up to $1,000 MFJ and $500 for all other filers.
In addition, the Arizona Military Family Relief Fund is available if made by December 31, 2019 for
up to $400 MFJ and $200 for all other filers.
A list of Arizona’s tax credits and the qualifying charitable organizations can be found here.
Annual Exclusion & Other Gifts
You can make gifts up to $15,000 per person or $30,000 for married couples to any family member or friend. You can make gifts into trusts for children or grandchildren. You can contribute to Internal Revenue Code Section 529 plans, which grow free of income tax. You can gift up to $6,000 ($7,000 of age 50 or older) to either a traditional or Roth IRA on behalf of others, as long as they have the earned income to qualify and have not already funded their own IRAs. In addition, you can make unlimited gifts directly to educational institutions and medical facilities.
Distribute Income from Trust & Estate Accounts
If you have an estate or trust, it can quickly be taxed at the highest tax rate. If your trust or estate allows, distribute the income (dividends and interest) to beneficiaries who may be in a lower tax bracket, so that the dividends and interest are taxed at the lower rate.
Mortgage Deductions & Refinancing
Most home equity lines and second mortgages are deductible. If you borrowed money to build, buy or substantially improve the home that secures your loan, the interest should be deductible.
New Kiddie Tax Rules
Children’s income is now taxed at rates that are applicable to trusts and estates, rather than at the parents’ top marginal rate. Children will need to file separate returns if their earned income exceeds $12,200 or if their unearned income (interest, dividends, capital gains) exceeds $1,100. Click here for 2019 Kiddie Tax Limits.
Versant Capital Management is here to help you with the tax strategy process. Ring in the New Year with the gift of a lower tax liability!
Senior Wealth Counselor at Versant Capital Management
Larissa provides comprehensive wealth management solutions and tax consultation services to Versant Capital Management’s clients.
Ann Pickrell, Versant Capital Management client associate, contributed to this article.
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