It's Almost 2020, Already

Melissa Lanigan, CPA (Oct, 2019)

As we reach the end of the year, that means a few things: holiday shopping, holiday parties, indulging in our favorite meals, baked goods, and yes…tax planning.  Tax planning not only means making those last minute donations to our favorite charities for 2019. It also means getting set up for a good tax position in 2020.

A few last minute 2019 tax planning ideas: 

  • Charitable Donations - If you are fortunate enough to still be able to itemize your deductions, make sure to write those last minute checks, drop off your gently used clothing or furniture, or donate stock to your favorite qualified non-profit organizations.  Do not forget to obtain appropriate written documentation to support the donations. If you can no longer itemize due to the increased limits, you should consider a Qualified Charitable Distribution (QCD) from your IRA account.  A QCD is a direct transfer of funds from your IRA payable to a qualified charity.  QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.  In addition to the benefits of giving to charity, the amount of the QCD is excluded from taxable income on your tax return.  You must make sure you obtain adequate documentation from the charity as well. 
  • Gifting - As an individual, you can gift up to $15,000 to any number of recipients without incurring any tax consequences.  Married?  Your spouse can also gift up to $15,000 to any number of recipients, without tax consequences.  That means together $30,000 can be excluded from your estate, tax-free.
  • ROTH IRA Contribution - Do you have working children? Consider setting up a ROTH IRA while their income is low, and allow the contributions to continue growing throughout their careers.  The maximum contribution for 2019 is $6,000 ($7,000 for those individuals over 50).  The earnings from the ROTH IRA may be withdrawn tax and penalty free.  This is one of the major benefits of a ROTH IRA. Of course there are some caveats to consider when making a withdrawal from a ROTH IRA, but it will be some time before your children will need to make any withdrawals.
  • 401(k) Contributions - Did you receive a big raise this year, or expect a big year-end bonus?  Consider maximizing your 401(k) contribution for 2019.  For 2019, employees can defer up to $19,000 into their 401(k) plan ($25,000 if age 50 or older).  Contributions to 401(k) plans are pre-tax.  Therefore, not only are you helping reduce your tax bill now, but you are saving for the future. 
  • Other Retirement Plan Contributions – If you do not have a 401(k) or are not eligible for one, consider contributing to a traditional IRA with a maximum contribution of $6,000 for 2019 ($7,000 if age 50 or older).  If you are self-employed, you can defer the lesser of $56,000 or 25% of net earnings from your self-employment income, up to $280,000, into a profit sharing/SEP plan.

Tax planning ideas for 2020:

  • Medicare - You often hear the cliché, age is just a number, but in the tax arena it could mean much more than that.  If you are going to be turning 65 years old in 2020, you will be eligible for Medicare.  If you are still working and receiving health insurance benefits through your employer, you may be able to come off your employer's group insurance plan.  If you are contributing your insurance plan premiums as pre-tax contributions, these will now be considered wages, and will be taxable.
  • Required Minimum Distributions - Age 70 1/2 is also a magic number.  If you are going to be 70 1/2 during 2020, you will be required to take a required minimum distribution (RMD) from your IRA account.  You will want to make sure you have withholdings taken from these distributions.  You should also consider the amount of your RMD compared to your other income.  The amount of your RMD may increase your income levels causing your social security income to be taxable, or impact your tax bracket. 
  • Increase Withholdings for 2020 - Were you unhappy because you owed taxes on your 2018 tax return?  This may have been because you reaped the benefits of lower withholding tables during the year (you received more in your take home paycheck instead of it going towards withholdings).  If you think you are in a similar situation for 2019, consider increasing your withholding for the last part of the year to decrease the tax bill come April 15, 2020.  Those increased withholdings may also help your tax bill in 2020.

There are many considerations regarding tax planning.  These are just a few items to consider before year-end.  Often, more than one tax planning scenario will need to be analyzed in order to properly manage your tax liability and cash flow come April. As always, please contact your Dermody, Burke & Brown advisor if you want to discuss any year-end tax planning ideas or if you have any questions.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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