10 End of Year Action Steps to Potentially Reduce Your Tax Burden
It’s the most wonderful time of the year…to take advantage of tax savings opportunities.
As we begin the final weeks of the year(!!!) consider the following 10 action steps to potentially reduce your tax bill and improve your financial footing in 2020 and beyond. While this list is not comprehensive, I’ve outlined some of the most common end-of-year strategies below, broken down by life phase. To evaluate your specific situation, I’d encourage you to reach out to me or your trusted tax professional.
Do you have earned income (a job)?
- IRAs/ROTH IRAs Contributions – Contributions for 2019 tax-year can be made until Tax time of 2020. Maximum contribution limits for 2019 are $6,000 for those under 50 and $7,000 for the “wiser” audience on this list (those 50 and over). If your income for the year was over $200K, it’s unlikely you’re eligible (based on Modified Adjusted Gross Income) to contribute to a ROTH IRA. If you’ve done so, please contact me. Anyone with earned income can contribute to a traditional IRA, though whether you can deduct your contributions depends on a number of factors.
Do you have children?
- Consider 529 Contributions – For those with children at or below college age may want to consider contributing to a 529 Plan. While not Federally tax-deductible, many states (CO, notably) allow for a state-tax deduction. Contributions to 529 plans must be made by the end of the calendar year.
- Consider giving them gifts for the holidays. Kids like gifts. Just checking if you’re still reading.
Have Retirement Accounts (IRAs, 401Ks, 403Bs, SIMPLE IRAs, etc)
- Over 70.5? Take Your RMD – Beginning no later than April 1st of the year following the year you turn 70.5 (Only the IRS/Congress could come up with this!!), you must begin withdrawing from your retirement accounts. If your accounts are held with Oak Street Investments, I will reach out to you to process your RMDs and will handle them. Note, that RMDs can be aggregated across IRAs (so you can take multiple RMDs from one account) though not across plan types (IRAs, 401Ks, etc).
- Under 70.5? Consider Contributing!
Have non-Retirement (Taxable) Accounts?
- Harvest Time – If your portfolio is held with Oak Street Investments at TDAI, we’ll discuss offsetting some gains and losses for existing holdings, if appropriate, and if it will allow us to better allocate your investments.
- “Lower” income – If this is a particularly low income year for you consider realizing some capital gains. Don’t forget about the 0% cap gains bracket for singles up to almost $40,000 in income and for married filing jointly up to almost $80,000…And that’s of Taxable income, not gross income! In short, if you have taxable accounts and your income is under these thresholds, consider taking some gains this year. Also consider converting some traditional IRA assets to Roth IRA assets while your income is unusually low.
Like Giving Money Away?
Note: the Tax Cut and Jobs Act greatly increased the standard deduction, making it less likely that people will itemize their taxes. As such, many people will not be able to deduct their charitable contributions. Here are some things to keep in mind:
- Over 70.5? If you’re over 70.5 with IRAs, the best strategy is to use your RMD for a Qualified Charitable Distribution (QCD) as you do not need to itemize to take advantage of this. Do not take your RMD then contribute it as that is not a QCD.
- Got Stock? If you have highly appreciated stock, this is almost always better than giving cash. Even with stock contributions, note you’ll need to itemize your deductions to recognize the full benefit.
- Use a Donor Advised Fund (DAF)- The whole point of a DAF is to separate the timing of charitable contributions from the tax deduction. In short, you get the deduction this year and can give money away for years to come from the fund.
Happy Holidays!
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