Want to pay less in taxes? Here are the eight moves you need to make before the end of 2019.
Christmas is coming, which means it is time to give yourself the gift of tax savings. We share some … [+]
2018 was the first year people filed taxes under the Trump Tax Plan, aka the Tax Cuts and Jobs Act (TCJA). Some are doing well under the TCJA, others in bluer states have seen their taxes skyrocket. All of this makes it extra valuable to sort out your 2019 tax situation well ahead of the April 15th tax deadline.
Allowable tax deductions have changed along with tax brackets, which may have altered your personal situation. Tax planning for the self-employed and small business owners is always more cumbersome. Most filers will need to pay at least a certain percentage of the taxes before year end to avoid IRS penalties.
Yes, there are a few ways to minimize your taxes after New Year’s Eve, but most of your tax planning tools will be limited once we reach 2020.
Cubes with words IRA, 401k and ROTH. Retirement plan. What are the deadlines to contribute to each … [+]
What are the Deadlines for your Retirement Account Contributions?
When and how much you can contribute to your retirement will vary between types of plans and types of contributions. The good news for those using a Roth IRA, or Traditional IRA, is they can be opened and funded all the way until April 15th 2020. The bad news is you can only contribute $6,000, per year. That will likely not be enough to fund a secure retirement for anyone earning average income or more.
Those with self-employment income should check out the SEP-IRA or Solo 401(k) plan. These valuable retirement accounts come with later contribution deadlines and higher contribution limits.
For SEP-IRAs, you may be able to contribute up to $56,000 for 2019. Even better, you have until October 15, 2020 to fully fund the account. That assumes you file your taxes on extension. Also, SEP-IRA accounts can be opened just before you file your taxes.
Typically, I prefer to use a solo 401(k) plan versus a SEP-IRA. It is just easier to make larger contributions, which translates to more tax savings. Individual K plans must be set up by December 31, 2019. The employee contribution should be made by year end, but you have until October 15, 2020 to fully fund the employer contributions to the plan. For 2019, you can contribute up to $56,000 into a solo 401(k), but that figure jumps an additional $6,000 if you are 50 years old or older.
Have you had enough taxes taken out of your paycheck over 2019?
Have You Withheld Enough Taxes From Your Paycheck?
There is nothing worse than a big surprise tax bill so see if you have had enough taxes withheld from your paycheck. That is more important for couples, and people who have switched jobs, or have multiple jobs. If you are self-employed, check to make sure you have paid enough in quarterly taxes throughout the year.
Tax refunds were down for people who make $100,000, or more, according to the IRS. If you are counting on a big tax refund to pay down debt or fund other purchases, you should also check your withholding before year end.
To help with this process, there is a tax withholding calculator available for free on the IRS site. This calculator is best for employees and retirees. The process is a bit more complex for the self-employed; if this is you, get the help of your Certified Financial Planner or Tax preparer.
Will You Take The Standard Deduction or Itemize?
Under the TCJA, millions more of taxpayers are simply taking the standard deduction versus itemizing. Previously, around 30% of taxpayers filed a Schedule A to itemize tax deductions but under the Trump tax plan, that number has dropped to just 10% of filers.
Much of the drop in itemizing is due to the $10,000 State and Local Tax (SALT) cap from the Trump tax plan. That costs people living in high-value real estate areas and/or high tax states dearly. As a Los Angeles-based financial planner, I can tell you that it is costing myself and many of my clients a ton in extra taxes. The $10,000 cap is the same whether you are single or married. With that in mind, it may be easier for more singles to itemize their tax deductions.
For the 2019 tax year, the base standard deduction is $12,200 for single files. The standard deduction doubles to $24,400 for married couples filing jointly.
Taking the standard deduction is one of the easiest ways to file your taxes. You won’t need to save receipts to validate your tax write-offs. All the same, it is worth the hassle to itemize your taxes if it will save your money!
Look at your investments in your non-retirement accounts. It may make sense to sell some winners, or losers, depending on your overall tax situation for the year. You can realize up to $3,000 in short-term losses to offset up to $3,000 of regular income each year. Unused short-term losses can carry forward for future use.
Required Minimum distribution rules can be confusing and complicated.
Have You Taken Your Required Minimum Distributions?
Without fail, I get several calls from prospective clients who did not take their Required Minimum Distributions (RMDs) and need help cleaning up the mess that it created. Most retirees will be required to take RMDs when they turn 70.5 years old. The deadline to complete the withdrawal is December 31, 2019, and the amount you must take out is based on your age combined with the account balance as of December 31, 2018.
Be Strategic with Charitable Donations
While most people give to charity to give back, a nice tax deduction can help you give more money, if you so choose. With more and more people utilizing the standard deduction, less people are actually getting a tax break for their charitable giving. One prevalent strategy to get around this is bunching deductions. That essentially means donating several years’ worth of gifts in a single year, pushing you above the threshold so you will benefit from itemizing your deductions.
If you are considering that strategy, you may want to look at using a donor-advised fund. You can make the contribution and get the tax deduction now, but distribute funds to charities at a later date. In the meantime, the money can be invested and potentially grow tax free.
Work with a Tax Pro If You Own Cryptocurrency
If you think tax law is complicated, then try and file taxes on your cryptocurrency holdings. The IRS is stepping up enforcement in this area, and you will want to report your gains or losses properly. You may need to do some tax-loss harvesting to help offset prior gains and minimize your current taxes.
Review Your Qualified Business Interest Deductions
If you have a small business or self-employment income, you may be eligible for the Qualified Business Interest (QBI) deduction. This is also known as the 199A pass-through business deduction. The bottom line, it works out to a 20% deduction for the net income of many businesses that operate as pass-through entities. The QBI tax deduction is limited for those with 2019 income of more than $160,725 (single) or $321,400 (married filing jointly).
Related: The Five Moves The Self-Employed Must Make Before Year End to Slash Their Tax Bills
For earners near those income thresholds, tax planning may become even more valuable. They may be able to get their income low enough to qualify for a larger 199A tax deduction. Things like contributing to a Solo 401(k) or Cash Balance Plan are the obvious ways. Tax-deductible donations to charity is another.
It isn’t how much you make but how you keep it that matters. Doing a little year-end tax planning can also help make the tax filing process just a little bit easier. Follow these eight tax-planning moves, and you should be able to avoid a big tax time surprise.