2019 is our second year following the significant tax law changes enacted under the Tax Cuts and Jobs Act (TCJA) and many taxpayers are still getting used to the new rules and the impact to their tax return.
Below are some potential tax moves you should consider making before year-end.
- Check your withholding and estimated taxes. In order to avoid interest and penalties on underpayment you either need to pay in 90% of the current years’ tax or 110% of the prior years’ tax. Because of the withholding table changes in 2018, that were done incorrectly by the IRS, many taxpayers received an unexpected tax bill last April. Fortunately, the IRS forgave the underpayment penalties for many people for 2018, but it won’t for 2019.
For Americans with a simple return, comparing your year-to-date paystub, which will contain the details of total pay, federal and state withholding, etc. versus your 2018 tax return will give you a good idea if you have paid in enough money in 2019 to avoid interest and penalties. If you haven’t, consider increasing your withholding or making a 4Q estimated tax payment to catch-up. The sooner a mistake is corrected, the less damage it does.
For Americans with a more complex return, consider having your CPA run a tax projection for you. This will give you a good estimate of what to expect in April and identify the amount of any 4th quarter estimated tax payment that may be required.
- Manage retirement plans. Savers are essentially required to take annual payouts from tax-sheltered retirement plans when they turn 70.5. The payout deadline is December 31, 2019, for most people and the withdrawal is based on the account value as of the last day of 2018. If this hasn’t already been taken care of it should be as soon as possible.
Another option to consider for those IRA withdrawals is to make a qualified charitable distribution directly from your IRA. Since the higher standard deduction poses a hurdle for those donors who want a tax break, consider contributing to a charity directly from your IRA. This reduces your RMD and gives you an above-the-line deduction.
- Evaluate capital gains and losses. Investors can use realized capital losses in taxable accounts to offset realized capital gains in taxable accounts. The excess losses are carried forward to future years. This is a particularly important planning point for investors around the $250k married filing jointly or 200k single income filing threshold. Above this level, you could trigger the 3.8% surtax on net investment income.
- Time your itemized deductions. Under the TCJA, the standard deduction doubled in 2018 to $24k for joint filers. In 2019 it is set at $24,400. This change in the law drastically reduced the number of taxpayers which itemized deductions on Schedule A for 2018. With this newer, elevated threshold, taxpayers may consider bunching their deductions every other year to produce a higher deduction over a two-year period. Depending on the taxpayers’ specific situation, this could include making extra charitable contributions or prepaying some property taxes or state estimates depending on how close you are to the 10k limit.
If you have any questions about these suggestions for year-end tax planning or want to discuss other common tax saving or tax deferring options, please let me know. Thanks.