It’s not too late to cut your 2019 tax bill. Prior to December 31st:
- Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $19,000 into your 401(k) or 403(b) plan at work. Anyone 50 or older by December 31st can put away an additional $6,000 for a total of $25k. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
- If you’re self-employed, consider setting up a Solo 401(k) by 12/31. A Solo 401(k) plan lets a self-employed person hit the $56k retirement plan max with less income than a SEP IRA, and also allows a person aged 50 or older to put away $62K into a retirement plan for 2019 versus $56k into a SEP IRA.
- Take a look at your withholdings and instruct your employer to withhold additional taxes to avoid getting hit with an underpayment penalty if you haven’t had enough taxes withheld during the year. (Take a look at the IRS’ Withholding Calculator to set your withholdings for 2020.)
- Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including capital gain distributions from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income while any losses still remaining get carried over to next year. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules.
- Consider selling your investments held more than one year that have increased in value if you are in the two lowest tax brackets since the long-term capital gains rate for you will be 0%. You can then buy back those securities, and the “cost-basis” will be the higher amount. Wash sale rules don’t apply to securities sold at a gain. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains realized don’t push you out of the 12% tax bracket since you’ll be taxed on those gains that fall outside that bracket at 12%.
- Send in your January 2020 mortgage payment early enough so it will be processed prior to 12/31/19. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier if you will be itemizing your deductions.
- Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition, and snap a few photos as well. Remember, only donations of clothing and household items in “good condition or better” qualify for a deduction.
- For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2020. And you always have the option of donating appreciated investments to charities or a Donor Advised Fund. You get to claim your donation based on the value of the assets donated without paying any capital gains taxes on the appreciation. (Use this IRS tool to confirm a charity as legitimate.) Don’t donate investments that have decreased in value. Instead, sell them first, take the loss on your taxes, and donate the money received from the sale.
- Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and will have less than $10k in state income taxes and real estate taxes combined..
- Pre-pay and pay off your medical bills if your total medical expenses exceed 10% of your income and you itemize.
And, as always, evaluate whether you’ll save any taxes by postponing 2019 income or deductions into 2020 or by accelerating 2020 income or deductions into 2019. With the Trump tax changes now in place, it appears that allowable deductions and tax brackets will be similar for 2019 and 2020. Please plan ahead accordingly.