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Year-End Tax Planning for Individuals

By: Tax Hotline
Fall 2019 (Vol. 37, No. 3)

If you anticipate an increase in taxable income in 2019, and are expecting a bonus at year-end, try to get it before December 31.

Bunching charitable deductions every other year is a good strategy if it enables the taxpayer to get over the higher standard deduction threshold. A second option is to put money into a donor advised fund that enables donors to make a charitable contribution and receive an immediate tax deduction.

Likewise, medical expenses are deductible only to the extent they exceed 10% of your adjusted gross income (AGI), therefore, bunching medical expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds.

Medical expenses and charitable contributions can also be prepaid this year using a credit card. This way deductions may be taken based on when the expense was charged on the credit card, not when the bill is paid.

If you think your tax bracket will be higher in 2020, take advantage of any employer stock options or it may be time to sell stock acquired by exercising an option this year.

If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2019, depending on your situation. Examples include: Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child tax credits, higher education tax credits, and deductions for student loan interest.

Accelerating income is a good idea if you anticipate being in a higher tax bracket next year. This is especially true for taxpayers whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax.

Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or any other large asset that may be subject to tax. Examples of accelerating income include:

  • Paying an estimated state tax installment in December instead of at the January due date.

  • Paying your entire property tax bill, including installments due in 2020, by year-end. This does not apply to mortgage escrow accounts.

Pay 2020 tuition in 2019 to take full advantage of the American Opportunity Tax Credit, an above-the-line tax credit worth up to $2,500 per student that helps cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable.

Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2019 tax return next April.

Keep in mind, Roth IRAs and 401(k) distributions are not subject to the Medicare Tax. In addition, if you’re close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well.

The alternative minimum tax (AMT) applies to high-income taxpayers that take advantage of deductions and credits to reduce their taxable income. The AMT ensures that those taxpayers pay at least a minimum amount of tax. AMT exemption amounts for 2019 are as follows: $71,700 for single and head of household filers, $111,700 for married people filing jointly and for qualifying widows or widowers and $55,850 for married people filing separately. In 2019, the phaseout threshold increases to $510,300 ($1,020,600 for married filing jointly).

Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity related travel expenses and some out-of-pocket expenses. Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit. Taxpayers age 70 or older can reduce income tax owed on required minimum distributions (RMDs) from IRA accounts by donating them instead.

Investment decisions are often more about managing capital gains than about minimizing taxes. For example, taxpayers below threshold amounts in 2019 might want to take gains; whereas taxpayers above threshold amounts might want to take losses. Where appropriate, try to avoid short-term capital gains, which are taxed as ordinary income (i.e., the rate is the same as your tax bracket).

In 2019 tax rates on capital gains and dividends remain the same as 2018 rates (0%, 15%, and a top rate of 20%) however, threshold amounts have been adjusted for inflation as follows:

  • 0%: Maximum capital gains tax rate for taxpayers with income up to $39,375 for single filers, $78,750 for married filing jointly.

  • 15%: Capital gains tax rate for taxpayers with income from $39,375 to $434,550 for single filers, $78,750 to $488,850 for married filing jointly.

  • 20%: Capital gains tax rate for taxpayers with income above $434,550 for single filers, $488,850 for married filing jointly.

Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000. If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.

After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., and ETF or another mutual fund with the same objectives as the one you sold.

If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free; your original investment is restored, and you have a higher cost basis for your new investment.

The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above a certain threshold amount ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIT provided the individual business owner materially participates in the business.

The federal gift and estate tax exemption is currently set at $11.40 million but increases to $11.58 million in 2020. The maximum estate tax rate is set at 40 percent.

Gifts to the recipient are exempt from the gift tax for amounts up to $15,000 a year per recipient in 2019 and remain the same for 2020. Cash or publicly traded securities raise the fewest problems. You may also choose to give property you expect to increase substantially in value later such as publicly traded securities or property to keep that value out of your estate.

The kiddie tax rules for 2019 are income exceeding $2,200 is taxed at the rates paid by trusts and estates. For ordinary income (amounts over $12,750), the maximum rate is 37 percent. For long-term capital gains and qualified dividends, the maximum rate is 20 percent. However, if the child is under age 19 or under age 24 and a full-time student, and both the parent and child meet certain qualifications, then the parent can include the child’s income on the parent’s tax return.

If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.

If you are an employee and your employer has a 401(k), contribute the maximum amount ($19,000 for 2019), plus an additional catch-up contribution of $6,000 if age 50 or over.

If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $6,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). You can contribute $7,000 if you are age 50 or over.

You can deduct contributions to an HSA account and investment earnings are tax-deferred until withdrawn. Amounts you withdraw are tax-free when used to pay medical bills. Medical expenses paid from the account are deductible from the first dollar regardless of percentage of AGI. For amounts withdrawn at age 65 or later that are not used for medical bills, the HSA functions much like an IRA. For 2019, to qualify for the HSA, your minimum deductible in your High Deductible Healthcare Plan must be at least $1,350 for single coverage or $2,700 for a family.

Maximize contributions to 529 plans, which starting in 2019, can be used for elementary and secondary school tuition as well as college or vocational school.