Unless you’re the type who likes the stress of the last-minute tax scramble — and potentially missing out on tax savings — it’s worth squeezing in a little tax planning in the next few weeks between the ugly sweater parties and holiday work mixers.
Of course, it’s always a good idea to check in with your tax and financial advisors to discuss your specific situation. But there are some smart tax moves to consider between now and the end of the year that could help shrink your tax bill. After all, who doesn’t want to save some money after seeing how much a picture with your local mall Santa costs? Our 2019 tax checklist can help you keep more of your money.
CONSIDER ITEMIZED BUNCHING
The concept of bunching itemized deductions has been around for some time. But with the changes to the tax law a couple years ago, it will likely make sense for a new group of taxpayers.
Itemized bunching works best for people whose itemized deductions are similar in value to the standard deduction ($12,200 for single filers in 2019 and $24,400 for married couples filing jointly). Basically, itemized bunching works by itemizing two years' worth of deductions in one tax year and then taking the standard deduction the next year. For example, you might choose to make two years’ worth of property tax payments (although you can only deduct up to $10,000 per year in state income and/or property taxes) or charitable contributions in 2019 so you can itemize those expenses this year. Then in the 2020 tax year, you’d take the standard deduction. Doing this helps make sure you don’t miss out on the potential tax breaks that can come with itemizing deductions.
MAX OUT YOUR QUALIFIED RETIREMENT CONTRIBUTIONS
If you’re saving for retirement, you’re likely taking advantage of one or more tax-advantaged savings options, like a 401(k) plan or a traditional individual retirement account (IRA). Because these types of accounts get favorable tax treatment, there are limits to how much you can contribute. If you have some extra money (despite the mall Santa visit) and you haven’t contributed the max for the year, now is the time to consider making a contribution.
While some qualified accounts technically give you until Tax Day to make your 2019 contributions, it doesn’t hurt to just make them now so you can start 2020 fresh.
In 2019, you can contribute up to $19,000 to a 401(k), 403(b) and most 457 plans. And that’s the limit for your contribution — employer matching doesn’t count against that. If you’re 50 or older, you can make an additional $6,000 catch-up contribution. In most cases, you can also contribute up to $6,000 to an IRA. Catch-up contributions to IRAs for people 50 or older are capped at $1,000.
CONSIDER A ROTH CONVERSION
Qualified retirement accounts come in two varieties, traditional and Roth. With a traditional account, you make pre-tax contributions now and your money will grow tax-free. But in retirement, you will be required to withdraw your money and pay taxes on those withdrawals. With a Roth account, the money you contribute now has already been taxed. That means it will grow tax-free and then you can withdraw it tax-free in retirement.
If you have a traditional retirement account, you may be able to convert some or all of your funds to a Roth account. There are several reasons that it could make sense to do a Roth conversion, including:
if your income was lower than usual in 2019.
if you think you will be in a high tax bracket in the future.
if you think tax rates will increase in the future. (Tax rates were lowered as part of the tax bill that passed in 2017. As of now, they’re set to revert to higher rates in 2025.)
If you’re in a high tax bracket and about to cross into a higher one, ask your employer about deferring any year-end bonuses into 2020 so you don’t have to pay taxes on that money this year.
In addition, now is the time to start thinking about next year, too, if you decide to defer income. If your employer has a nonqualified deferred compensation plan — which means they offer you some compensation they will owe at a later date — you’ll need to make that election before the end of the year; otherwise that money will be paid in 2020.
DONATE INVESTMENTS DIRECTLY TO CHARITY
If you have stock that you’ve held for longer than a year and you’re looking to make a charitable contribution, donating your stock directly to the charity offers tax advantages. That’s because the donation allows you to avoid paying tax on your investment gain while still allowing you to deduct the fair market value (up to a certain percentage of your adjusted gross income1) of your donation (assuming you’re planning to itemize this year).
If you’re 70 ½ or older and don’t need the income from a required minimum distribution (RMD), you could also consider an IRA charitable rollover. With this strategy, you make a distribution from your IRA directly to a qualified charity.2 The distribution satisfies your RMD for the year, and that money is also excluded from your income (which lowers your tax burden). This might be more tax-efficient than receiving the distribution, getting taxed on it, and then deducting that amount as part of your charitable contribution.
TAX-LOSS HARVEST YOUR INVESTMENTS
If you had investment gains and losses this year, now may be a good time to sell some of your losing investments so that the loss offsets your gains tax-wise. You can also use investment losses to offset up to $3,000 worth of ordinary income, and you can carry over additional losses to deduct in future years. Just be aware that you can’t repurchase any stock that’s substantially identical to what you sold within 30 days before or after the sale.
1 You may deduct up to 20 percent of your AGI for a gift to a private foundation and you may carry forward deductible amounts not used in a given year for up to five years. For gifts to a public charity, you may deduct up to 30 percent of your AGI; you may deduct up to 50 percent of your AGI if you elect to limit your deduction to the basis of the asset you donate.
2 Up to $100,000.
This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.