As we approach the end of the year, this is a good time to think about steps you may be able to take that will lower your tax bill for this year, and possibly for 2020 as well.
Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for others. You should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, and see if you can reduce MAGI other than NII.
The 0.9% additional Medicare tax may require higher-income earners to take year-end actions. This tax applies to individuals whose total wages from employment and self-employment income exceed a threshold amount: $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case. Employers must withhold the additional Medicare tax from wages in excess of $200,000, and self-employed persons must include it in figuring their estimated tax.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on your taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the maximum zero rate amount (e.g., $78,750 for a married couple). If you hold long-term assets that have appreciated in value, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
If you can, postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.
It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus coming your way. Postponing income also helps if you anticipate being in a lower tax bracket next year.
In some cases, however, it may pay to accelerate income into 2019 – for example, if you will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or you expect to be in a higher tax bracket next year.
Many taxpayers won’t be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, and $18,350 for heads of household), and because many itemized deductions have been reduced or abolished.
No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster, and only to the extent the $100-per-casualty and 10%-of-AGI limits are met.
You can still itemize: medical expenses, but only to the extent they exceed 10% of your adjusted gross income; state and local taxes up to $10,000; charitable contributions; and interest deductions on a restricted amount of qualifying residence debt. However, payments of those items won’t save taxes if they don’t cumulatively exceed the standard deduction amount that applies to your filing status.
Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if you know you will be able to itemize deductions this year but not next year, you can make two years’ worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.
Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions, even if you don’t pay your credit card bill until after the end of the year.
If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2019, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end, to pull the deduction of those taxes into 2019. But because state and local tax deductions are limited to $10,000 per year, this strategy won’t help if it causes your 2019 state and local tax payments to exceed $10,000.
Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70. If you turned age 70 in 2019, you can delay the first required distribution to 2020, but you will have to take a double distribution in 2020 – the amount required for 2019, plus the amount required for 2020. That could push you into a higher tax bracket next year.
If you are age 70 or older by the end of 2019, have traditional IRAs, and particularly if you can’t itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs. The amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040, but the charitable distribution reduces the taxable amount of your required minimum distribution.
Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2019.
Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the “kiddie tax.”
If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018). If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2019 in order to maximize your casualty loss deduction this year.