Immediate and Long-Term Tax Planning Tips
Over the last two years, we have seen many individual tax changes that may have reduced some deductions, increased others and dramatically changed your tax return. There are still a number of tax planning strategies available and in this letter, we will remind you of a few.
The 401k continues to be America’s #1 tax shelter. If your employer offers a 401k plan, deferring the maximum amount the IRS allows will reduce your taxable income and tax you owe. The 2019 contribution limit is $19,000 and if you are 50 or over the limit is $25,000. There’s still time to increase your contributions for 2019. The 2020 limits are $19,500 and $26,000. If your employer provides a match, ensure you are at least saving the percentage of your salary to get the match, this is free money!
You may have experienced a surprise when you filed your tax return. This was likely because your withholding adjustment may not have reflected your actual tax situation. Now is a great time to look at your projected tax. Doing this will help avoid unwanted penalties/interest as well as help you plan for cashflow needs. There is time to adjust your withholding before the end of the year.
Health Savings Account (HSA)
The Kaiser Family Foundation reports this year that 41% of American W-2 employees will be covered by a health savings account at work. If your employer does not deposit the maximum amount allowable into this plan, you have until April 15, 2020 to add the remaining amount (up to the 2019 maximum) to the amount they put in. An HSA is the 2nd best tax planning move of all time. The maximum for 2019 is $3,500 for single coverage or $7,000 for family coverage and in 2020 the maximum is $3,550 for single coverage or $7,100 for family coverage. The catch-up contribution for those over the age of 55 is an additional $1,000 for 2019 and 2020.
Some employers allow you to deposit your health savings account amounts through a cafeteria or 125 plan. If available to you, this is the best way to put your own money in because of the additional tax savings available by avoiding Social Security tax. You are probably too late to do much for this year but make this your 2020 New Year’s financial resolution.
Fewer Americans are now able to itemize deductions because of the huge benefit received from the increased standard deduction. That doesn’t mean that you still can’t do anything though. One simple strategy to get the best “bang for your buck” is to practice what we call bunching of charitable contributions. This trick guides you to make charitable contributions every other year so that you double up and get a deduction in some years without giving it up in others. Simply make your 2020 contributions as early as possible in 2020, and then make your 2021 contributions at the very end of 2020 so that you “bunch” all your amounts in one year to potentially get the best-itemized deduction amount.
Itemized vs Standard Deduction
We still need all of your information to determine if it’s better for you to itemize or take the standard deduction. One planning item we used last year, was to take the standard deduction on the Federal return but the itemized deduction on the State return. Yes, you can do that and in many cases, it saved clients over $1,000 in State taxes.
Because there is no longer any deduction for work-related expenses you must carefully read your employer’s handbook to see if they offer a reimbursement program for job-related expenses like licenses, dues, uniforms, supplies, etc.
Qualified Business Income Deduction
If you own a business or a rental property, we likely discussed this deduction (a potential 20% deduction on business income) with you last year. There are several reasons why year-end planning is particularly important for this deduction. The deduction can be limited based on taxable income, which means that planning for minimizing income can be important. Also, for rental property owners, there are requirements that may need to be satisfied before the end of the year for you to take this deduction. We can help you navigate this complexity.
Stock as a Charitable Donation
If you are considering selling some old stock investments you might want to consider giving them directly to charity and avoiding writing checks because you are able to deduct the full fair market value of the stock you give away and not include the capital gain as taxable income. While we are at it, if you are over 70 ½ and have an IRA you should not be writing checks to charity, instead, you should be using the “Direct IRA to charity” strategy to avoid tax issues while qualifying for and satisfying the Required Minimum Distribution (RMD) rule.
If you had a divorce or separation that recently was finalized, any alimony paid or received will not be deducted or included in income. Contact us if you have questions about how this will affect your tax liability.
Based on changes in the tax law, the tax on children’s investment income (known as “kiddie tax”) is now calculated at the trust and estate tax rates. There can be alternatives to filing a separate tax return based on the amount and type of income, and we can help you determine the best strategy.
We continue to worry about unreported foreign investments, and we suggest you very carefully consider whether you have control over a foreign checking account or hold stock outside the United States. These must be reported, or they essentially face 50% penalties each year. We can help you analyze and comply with this red flag for audits.
This year the IRS and Congress have become very concerned about crypto-currency (like Bitcoin) and you must be certain to report any of these transactions – there is even a new question on every tax return asking about it. If you have Crypto-Currency you must let us know so we can advise you on how to best comply with your reporting obligation.
Planning for Social Security
It’s important to remind yourself that your Social Security benefit is based on your highest 35 years of earnings, so taking some time away from the workforce, or aggressively writing off business expenses can really have a long-term negative effect on retirement.
The IRS will not call you. Scams and fraud remain a significant threat. Our firm takes security very seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
- Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you
- Get an unsolicited email or another form of communication asking for your bank account number or other financial details or personal information
- Receive a robocall insisting you must call back and settle your tax bill
- Make sure you’re taking steps to keep your personal financial information safe. Let us know if you have questions or concerns about how to go about this.
Affordable Care Act (ACA)
Recent tax law changes repealed the penalty that the ACA imposes on individuals who do not have health insurance. However, other aspects of the ACA still are in place. Contact us if you have questions about how this affects you.
Be sure your retirement planning is up to date. We recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs, and company retirement plans. We can help you determine whether you’re on target to reach your retirement goals.
Please remember year-end planning equals fewer surprises. There are many other opportunities to talk about as year-end approaches. And, many times, there may be strategies such as deferral of income, prepayment of expenses, etc., that can help you save taxes.
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