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Year-End Tax Planning Tips

With the year-end fast approaching, it is time to consider some strategic moves to reduce your 2019 tax bill.  This year’s market activity makes it all the more important for clients and advisors to consider tax saving strategies.  Where appropriate, realizing gains, harvesting losses and considering gifts to family and charity are all tax efficient strategies. 

Retirement Plans

You may be able to contribute more to a workplace retirement plan this year because the IRS has increased certain limits for inflation. Take full advantage of your employee retirement plan, at least to the point of any employer match. As with your pre-tax salary deferrals, any employer contributions to your plan account are not taxed to you until distributed.

Some retirement plans allow participants to make after-tax contributions in addition to regular pre-tax or Roth salary deferrals.  If you are a high earner and your plan allows it, consider making after-tax contributions with the intention of converting those amounts to a Roth IRA when you leave the plan.

If you are over the age of 70.5, or have an Inherited IRA, you will have to take a Required Minimum Distribution (RMD) before year-end. RMDs from multiple accounts can be aggregated and taken from one.   

Establish and fund IRA’s for next generation

Help your child or grandchild get an early start on saving for retirement.  Consider making a gift of up to $6,000 to either a traditional or Roth IRA for those who are not funding their own accounts, but have enough earned income to do so.   Contributions can be increased to $7,000 for account owners 50 years or older.   Contributions to IRA’s for your family members are taxable gifts and should be coordinated with other gifts that you make during the year.

Prepay deductible expenditures
Standard deduction is now $12,200 for individuals, $18,350 for heads of household and $24,400 for married couples filing jointly.  If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2019 write-offs makes sense if you expect to be in the same or lower tax bracket next year.

  • State and Local Taxes – prepay state and local income and property taxes that are due early next year can reduce your 2019 income tax bill.  Up to $10,000 is deductible.

  • Mortgage Payment(s) – Accelerating your mortgage payment that is due in January will give you 13 months’ worth of deductible interest in 2019 on up to $750,000 of mortgage debt.  You can also use the same strategy for a vacation home
  • Bunching Deductions – Consider “bunching” several years of charitable contributions into one year with a Donor Advised Fund. 
     
  • Miscellaneous Deductions – all miscellaneous deductions subject to 2% of AGI are eliminated for Tax Years 2018-2026.  


Be careful if you will owe the alternative minimum tax (AMT) this year as this prepayment strategy could backfire.  Under the AMT rules, write offs for state and local taxes and miscellaneous deductions are disallowed.  Speak with your tax advisor to see if you fall under AMT before you accelerate these deductions.

Charitable Donations

Charitable deductions are very valuable in this income tax rate environment.  Consider starting a Donor Advised Fund (DAF) or contributing appreciated stock instead of cash to a charity or DAF.   DAF’s allow you to front load charitable contributions into one calendar year, but pay out the money over time.  

Gifting certain appreciated assets to select charities can also provide more “bang for the buck,” as you not only may get an income tax deduction based on the fair market value of the donated asset, but you would also not have to pay capital gains tax on that asset’s unrealized appreciation.   Clients’ should realize the full benefit of a tax deduction in the current calendar year, which could be helpful if there has been a spike in income.

Tax Loss harvesting 

Tax loss harvesting involves selling an investment that has lost value to realize a capital loss and using that loss to offset either any realized capital gains or up to $3,000 a year in ordinary income.  However, you do not want to undermine your long-term investment goals and sell investments just for tax purposes.  Don’t let the tax tail wag the investment dog. 

If this strategy is appropriate for you, it is important to maintain your strategic asset allocation so that you continue to participate in the market.  The IRS will not allow you to write-off the loss if you purchase substantially the same investment 30 days before or after the sale.  This is called the “wash sale” rule.  

Capital Gain Distributions

If you own any investments in taxable accounts that are subject to end-of-year capital gain distributions, consult with your advisor on strategies to minimize the tax liability. 

Estate Planning 

For 2019, the Federal Gift and Estate Tax exemption is at $11.4 million.   This exemption can be used during your lifetime to make gifts or at death to reduce or eliminate estate taxes.  You may want to consider using a portion of this exemption removing the value and any appreciation from your estate.  Even if you have an existing estate plan, you may want to have it updated to reflect these higher thresholds.

Annual gift exclusion 

You can make annual exclusion gifts of up to $15,000 a year or $30,000 per couple to an unlimited number of individuals free from gift tax or without using any of your federal exemption.  If you are making these gifts to an irrevocable trust, such as a life insurance trust that provides the beneficiaries with a limited withdrawal right, make sure the trustee notifies the beneficiaries and keeps the appropriate documentation (often referred to as “Crummey” Letters).  Taking advantage of the annual gift tax exclusion can reduce your estate that may be subject to inheritance taxes.

Fund 529 Plans

Consider funding 529 plans by December 31 to apply 2019 annual gift tax exclusion ($15,000) treatment to the contributions.   You can “front-load” 529 plans by making 5 years’ worth of annual exclusion gifts to the 529 plans.  In 2019, you could transfer $75,000 ($150,000 for a married couple) to a 529 plan without

Generating a gift tax or use up your estate tax exemption. 

Fund Health Care Savings Account

If you have a high deductible healthcare plan, consider opening an HSA.  If you qualify, you can contribute up to $3,500 for an individual and $7,000 for families, and an additional $1,000 catch-up contribution if you are over 55.   

Annual Checklist

  • Review portfolio for current risk level and circumstances
  • Review your 2019 spending and create a budget
  • Review your outstanding debt, including interest rates and terms
  • Update your financial statement/balance sheet
  • Review insurance portfolio to make sure it meets your coverage needs
  • Revisit your Wills, Trusts, Power of Attorney, Health Care Proxies to make sure you are comfortable with the agents
  • Confirm beneficiary designations and asset titling
  • If you met your health insurance plan’s annual deductible, consider incurring any additional medical expenses 
  • Be sure to deplete your Flex Spending Account (FSA) 
  • Create an updated list of all logins and passwords

Sources: Internal Revenue Service, Fidelity Year-End Tax Strategies, PWC Managing Your Wealth, JPM Morgan Advice Lab

Views expressed areas of date indicated, based on information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the Sandy Cove Advisors.   Sandy Cove Advisors does not assume any duty to update any of the information. Information provided is general in nature. It is not intended to be, and should not be construed as, legal or tax advice. Sandy Cove Advisors does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

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