The season for trick or treating is here. Your thoughts turn to ghosts and goblins and scaring and being scared. In keeping with the season, maybe it is time to think about taxes, always scary enough.
Maybe you can take some of the fright out of this by setting aside some time to plan. Effective planning requires that you have a good understanding of your current tax situation and how your circumstances might change next year. There can be a real opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. However, the window for most tax-saving moves closes Dec. 31.
Consider opportunities to defer income to 2020, particularly if you think you may be in a lower tax bracket. You may be able to defer a year-end bonus or delay collection of business debts, rents, or payments for services, or the sale of assets. Doing so may enable you to postpone payment of taxes on the income until next year. You may also look to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2020) could make a difference on your 2019 return. Recent tax law changes substantially increased the standard deduction amounts and made significant changes to itemized deductions. It may be useful to bunch itemized deductions in certain years; for example, when they would exceed the standard deduction.
If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer (on Form W-4) to increase your withholdings for the remainder of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This can be used to make up for low or missing quarterly estimated tax payments.
Deductible contributions to a traditional IRA and pre-tax contributions to an employer sponsored retirement plan such as a 401(k) can reduce your 2019 taxable income. Consider making contributions up to your maximum amount allowed. Once you reach age 70 ½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer sponsored retirement plans. Take any distributions by the date required, the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required. For 2019, you can contribute up to $19,000 to a 401(k) plan ($25,000 if you’re age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you’re age 50 or older). The window to make 2019 contributions to an employer plan generally closes at the end of the year, while you typically have until the due date of your federal income tax return, excluding extensions, to make 2019 IRA contributions.
You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some of those gains by selling losing positions. Any losses over the amount of your gains can be used to offset up to $3,000 of ordinary income, or carried forward to reduce your taxes in future years. Don’t forget to account for the 3.8% net investment income tax. This additional tax may apply if your modified adjusted gross income exceeds $200,000 for single filers, $250,000 if married filing jointly.
There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who is able to evaluate your situation and help you determine if any year-end moves make sense for you. They may even know of a few tricks to make this process less scary and treat you to a reduced tax obligation.