NOW THAT WE’RE IN THE SECOND YEAR of the Tax Cuts and Jobs Act, the sweeping tax legislation that passed at the end of 2017, its provisions are generally better understood by both taxpayers and tax professionals. The rule changes regarding certain deductions may have provided extra incentive for you to look for new ways to minimize tax liability. At the same time, you should be aware that further changes may come from a tax package that some in Congress are hoping to pass by the end of this year.
Speak with your tax advisor about some or all of the ideas below, suggested by accountant Vinay Navani, of WilkinGuttenplan—and check out the “2019 Year-End Tax Planning Guide” at the end of this article.
As a CPA and shareholder at WilkinGuttenplan, Mr. Navani is not affiliated with Merrill. Opinions provided are his, do not necessarily reflect those of Merrill and may be subject to change. Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
1. Decide whether itemizing is still for you
The new law greatly increases the standard deduction to $24,400 for married couples filing jointly, $12,200 for single filers in 2019. It also places new limits on itemized deductions, including a $10,000 cap on property and state and local income tax deductions. Taking the standard deduction instead of itemizing may make tax preparation simpler, Navani says. At the same time, work closely with your tax specialist to make sure it’s the right choice, which will depend on factors ranging from your health expenses to charitable giving (see Tips 7 and 8).
2. Max out on your retirement plan
The new laws don’t change this advice: Think about increasing your contributions to your 401(k), IRA or other retirement plan to reach the maximum contribution amount.
Not only does this offer the possibility of increasing your retirement savings, but it will also potentially lower your taxable income. If you’ll be age 50 or older at any time during the calendar year, take advantage of “catch-up” contributions (an extra $6,000 for a 401(k) plan and an added $1,000 for an IRA1), Navani suggests. You generally have until December 31, 2019, to contribute to a 401(k) plan and until April 15, 2020, to contribute to an IRA for the 2019 tax year.
3. Consider converting your traditional IRA to a Roth IRA
Although there are income limits for contributing to a Roth IRA,2 anyone can convert all or a portion of their assets in a traditional IRA (or other eligible retirement plan) to a Roth IRA. Why might doing so make sense? Unlike with a traditional IRA, qualified distributions from a Roth IRA aren’t generally subject to federal income taxes, as long as the Roth IRA has been open at least five years and you have reached at least age 59½. However, you’ll be required to pay income taxes on the amount of your deductible contributions, as well as any associated earnings, when you convert from your traditional IRA to a Roth IRA—or, if you don't convert, when you retire and take withdrawals from your traditional IRA.
Depending upon your particular situation, it could be beneficial to convert from a traditional IRA to a Roth IRA and pay taxes now, rather than holding the funds in the traditional IRA and paying taxes upon distribution at a later date. Consult with your tax advisor to see which might suit your circumstances better.
4. Use stock losses to offset capital gains
Now may be a good time to consider selling certain underperforming investments in order to generate a capital loss before the end of the year—which could help offset the capital gains you realize when selling stocks that are performing well. In addition, you may generally deduct up to $3,000 ($1,500 if married and filing separately) of capital losses in excess of capital gains per year from your ordinary income. If your net capital losses exceed the yearly limit of $3,000 ($1,500 if married and filing a separate return), you can carry over the unused losses to the following year. Note that under the new law, investors will continue to pay long-term capital gains taxes at a rate of 0%, 15% or 20% (depending on their overall income) but with adjusted cutoffs. Married couples filing jointly and earning $78,750 or less ($39,375 for singles) will pay nothing. Married couples filing jointly earning between that and $488,850 (or that and $434,550 for singles) will pay 15%, while married couples filing jointly and earning more than $488,850 or more ($434,550 for singles) will pay 20%.3
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5. Look for tax-aware investing strategies
If your income is at least $200,000 ($250,000 for married couples filing jointly or qualifying widow or widower, $125,000 for married filing separately), you're subject to a 3.8% Net Investment Income Tax on either your net investment income or your modified adjusted gross income over the threshold amount, whichever is less. (Your tax advisor will understand.) Putting a portion of your income into investments not generally subject to federal income taxes, such as tax-free municipal bonds, probably won’t affect your tax picture this year, but could potentially ease your tax burden down the road when they start generating income.
6. Fund a 529 education savings plan
By putting money into a 529 education savings plan account, you can give a tax-free gift to a beneficiary of any age. Generally, you can make a gift of up to $15,000 per beneficiary annually ($30,000 from a married couple electing to split gifts) without having to fill out the federal gift tax form. You may also be able to contribute up to five years’ worth of gifts ($150,000 from a married couple electing to split gifts) per beneficiary in one year, as long as no other gifts are made over that period.4
Under the new tax laws, 529s may be also used to pay up to $10,000
of qualified higher education expenses annually for the beneficiary's
enrollment or attendance at a public, private or religious elementary
school, secondary school, or registered and certified apprenticeship
program, free from federal income taxes.5 State tax treatment may vary. But
because 529s are most effective when your investment has years to
grow, they may be less beneficial for paying elementary or secondary
school tuition than for college expenses, Navani notes.
Both health savings accounts and flexible spending accounts could allow you to sock away pretax contributions for qualified medical expenses.
7. Cover health care costs efficiently
Both health savings accounts (HSAs) and flexible spending accounts (FSAs) could allow you to sock away pretax contributions for qualified medical expenses that your insurance doesn’t cover.
But there are key differences to these accounts. Most notably, you must purchase a high-deductible health insurance plan and you cannot have disqualifying additional medical coverage, such as a general purpose FSA, in order to take advantage of an HSA.
One important benefit of HSAs is that you don't have to spend all of the money in your account each year. Though some employers allow you to roll over as much as $500 in FSA funds from year to year, generally, the funds you contribute to an FSA must be spent during the same plan year.
Also, while you can deposit funds into an HSA up to the tax filing due date in the following year, up to the maximum dollar limit, and still receive a tax deduction for the current tax year (e.g., you can make your 2019 contribution by April 15, 2020), FSA contributions are generally only elected during open enrollment or when you become an employee of a company.
Be sure to check your employer's rules for FSA accounts. If you have a balance, now may be a good time to estimate and plan your health care spending for the remainder of this year. In addition, see if the account balance can be used to reimburse you for qualified medical costs you paid out-of-pocket earlier in the year.6
8. Give to your favorite charity—or your
Charitable gifts such as cash or appreciated stock are still tax-deductible if you itemize, but not if you take the standard deduction. If you give regularly to charities, consider putting several years’ worth of gifts into a donor-advised fund (DAF) for a single year—that step may make it worth your while to itemize, Navani suggests. “Then, you can spread out the giving from the DAF over the next several years, based on your charitable intent.”
Another change: Taxpayers who itemize can now deduct cash charitable contributions of as much as 60% of their adjusted gross income, up from 50%. That could work to the benefit of, say, a retired person with significant assets and modest living expenses.
You can give as many family members as you like up to $15,000 per year ($30,000 from a married couple), each, without reporting it to the IRS. Generally, once the gift is made, your estate will not pay estate taxes on it, and it will not be considered taxable income for the recipient. However, also remember that the donor’s tax basis for gifts carries over to the gift’s recipient, subject to a few qualifications—which means that in some cases, waiting to give could make sense. Also, the lifetime federal gift and estate tax exemption has more than doubled, to $11.40 million for individuals ($22.80 million for couples), meaning that far fewer estates will owe estate tax.
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2 Eligibility to contribute to a Roth IRA for the tax year 2019 begins to be phased out if modified adjusted gross income (MAGI) equals or exceeds $122,000 for single taxpayers and $193,000 for married taxpayers filing jointly and qualifying widow(er)s. See your tax advisor for additional information on how the phase-out applies.
4 Contributions during 2019 between $15,000 and $75,000 ($30,000 and $150,000 for married couples filing jointly) made in one year can be prorated over a five-year period without subjecting you to federal gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $75,000 ($150,000 for married couples electing to split gifts) maximum, additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $15,000 ($30,000 for married couples filing jointly) per year. Federal gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $15,000 and $75,000 ($30,000 and $150,000 for married couples electing to split gifts) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her estate for federal estate tax purposes. Please consult your tax and/or legal advisor for such guidance.
5 To be eligible for the favorable tax treatment afforded the earnings portions of a withdrawal, if any, from Section 529 accounts, withdrawals must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. Withdrawals from 529 plans are federally tax-free when used for qualified higher education expenses, including tuition and fees, room and board, books, required supplies and equipment, computers or peripheral equipment, computer software or Internet access and related services. Other acceptable expenses include payments for special needs beneficiaries at any accredited school, including public or private universities, graduate schools, community colleges, and accredited vocational and technical schools. You can also take a federally tax-free distribution from a 529 of up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school. State tax treatment may vary. For distributions taken after December 31, 2019, qualified higher expenses now include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in a registered and certified apprenticeship program and payment of student loans up to a lifetime maximum of $10,000 for a designated beneficiary or a sibling of the designated beneficiary (the lifetime maximum is applied separately for the sibling’s loans versus the designated beneficiary’s loans).
6 This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice. If you have questions regarding your particular health care situation, please contact your health care, legal or tax advisor.