Don’t Miss These 2019 Tax Planning Opportunities for Individuals

This blog post was previously published on November 21, 2018. It was updated on November 11, 2019.

Plan for capital gains, charitable giving and retirement contributions before the year ends

With year-end approaching, now’s the time to speak with your tax advisor about planning that could help reduce your tax liability for 2019. Unlike 2018, 2019 has not seen major tax law changes that affect individuals (although contribution limits have changed), and the key strategies to reducing your tax liability remain the same.

We recommend looking at tax planning over a two-year period; below are a few strategies to consider.

Plan for capital gains

For 2019, joint filers’ long-term capital gains are taxed at 15% when their annual taxable income ranges from $78,751 to $488,850. Once their income exceeds $488,850, capital gains are taxed at 20%.

Taxpayers who are over the thresholds may consider selling some depreciated investments to generate losses in order to offset the gains. If possible, taxpayers near the thresholds may consider deferring income to 2020. In some cases it may be possible to lower income enough so that the gains are taxed at 15%.

If you think your income may be lower in 2020 and place you into a different bracket, you may want to hold off on the sale of an asset with a capital gain.

Accelerate or defer income

Because 2020 is a major election year and Congress is divided, we believe there is little chance of legislation changing tax rates. That means there may not be much advantage in postponing ordinary income into 2020, since it’s unlikely that rates will go lower. Nonetheless, it’s important to run projections to determine taxable income for the current and future tax years. Depending on which income tax bracket you’re expected to fall into, you may be able to save on taxes by accelerating or deferring income.

Bunch deductions and charitable giving to maximize tax impact

For 2018, The Tax Cuts and Jobs Act increased the standard deduction by nearly doubling it. For 2019, single filers will receive a $12,200 standard deduction ($24,400 for joint filers). In addition, the act capped the state and local tax deduction at $10,000, eliminated the home equity debt deduction, reduced the mortgage income deduction and eliminated a few other miscellaneous itemized deductions. This means that many taxpayers who itemized deductions before 2018 will now take the standard deduction.

However, some taxpayers can benefit by bunching their deductions, especially charitable gifts. Bunching essentially means making two years’ worth of charitable contributions, every other year. If you plan to make annual contributions, and you are close to the threshold for taking the standard deduction versus itemizing, talk to your tax advisor. It may make sense to double your charitable contributions every other year instead of making an annual contribution, to take advantage of itemizing your deductions. Here’s how it might work:

• For example, let’s say you have $18,000 of itemized deductions before any charitable contributions and make a $5,000 charitable contribution annually. After the contribution, you would have $23,000 of itemized deductions. This amount is under the standard deduction amount of $24,400, so you would receive no tax benefit for the contribution in this scenario.
• If you waited until the following year and contributed the $5,000 you planned to contribute from the prior year, plus an additional $5,000 for that year, your itemized deductions would be $28,000. You would receive an additional $4,400 deduction just due to the timing of the contributions.

Consider making charitable contribution directly from your IRA

Taxpayers who are required to take required minimum distributions (RMDs) from an IRA and who will take the standard deduction may still benefit by making charitable contributions directly from their IRA. The amount contributed counts towards the RMD, which reduces the taxable amount of the IRA distribution.

• For example, if you are required to take $50,000 in RMDs and contribute $5,000 directly to a qualified charity, you will only pay tax on $45,000 of the IRA income.

Make smart retirement plan contributions

Deferring income to retirement plans is an easy way for individuals to lower taxable income for this year, while saving for future years. Taxpayers who are employed and participate in a 401(k) can contribute up to $19,000 during 2019; those over age 50 can contribute an additional $6,000. If you have a traditional IRA, your contribution limit for 2019 rose to $6,000 – the first increase since 2013; the limit for taxpayers 50 or older is $7,000. Keep in mind if you or your spouse is covered by a retirement plan at work and your income is above certain limits, you may be restricted in deducting the IRA contribution.

Self-employed individuals may contribute up to $56,000 to a SEP IRA for 2019, all of which is tax-deductible. Business owners with no employees who have a solo 401(k) can contribute up to $56,000 for 2019, and catch-up contributions for those over age 50 may be possible.

Many high earners may find themselves ineligible for an IRA or 401(k), but those over 50 may be able to contribute several hundred thousand pre-tax dollars to a defined-benefit plan.

The bottom line: Be sure to talk with your professional team about the best retirement savings vehicles for your situation.

These are just a few examples showing the importance of tax planning before year-end. Contact your Kaufman Rossin tax advisor to learn more about what you can do now to lower your 2019 tax bill.