With the end of the year quickly approaching, it’s time to plan how you will limit your personal tax liability for 2019. You will want to be sure your year-end tax strategies take full advantage of the many opportunities offered by the tax code.
1. Get past the standard deduction allowances
We’re in the second year of higher standard deduction amounts:
- $12,200 for single filers and married couples filing separately
- $24,400 for joint filers
- $18,350 for heads of household.
These amounts will also be slightly higher if you are 65 or older.
If your actual itemized deductions for 2019 are near your standard deduction amount, you could consider accelerating some 2020 expenditures (charitable contributions, pre-paying medical expenses, etc.) into the current year to put you over the standard deduction. This strategy is called “bunching” and can reduce this year’s tax liability.
You may end up claiming the standard deduction next year, but because it is indexed to inflation, it will be a bit higher than this year.
2. Do some grazing for gains and losses in taxable accounts
The end of the year is your last opportunity to offset any capital gains you already triggered during the year. Consideration should be given to whether you are in the zero, 15% or 20% capital gains bracket. If you are in the 20% capital gains bracket, you might want to capture losses to offset your gains. Note, higher-income earners may also be subject to the 3.8% Net Investment Income Tax (NIT).
3. Take advantage of a 0% tax rate on investment income
You can take advantage of the 0% tax rate on long-term capital gains and qualified dividend income if:
- Your individual taxable income is $39,375 or less,
- Your joint taxable income is $78,750 for joint filers, or
Your joint income is $52,750 if you are a married couple filing separately.
If your income exceeds those thresholds, you could consider gifting appreciated securities held for more than one year to your children or grandchildren, if they are in the 0% bracket. They could sell those securities and pay 0% tax on the long-term capital gains.
Be careful when gifting shares to children under age 24 because it could trigger the Kiddie Tax. This exposes any resulting capital gains or dividend income to higher tax rates associated with trusts and estates, thereby eliminating any advantage.
4. Gift your winning or losing stocks
If you are charitably inclined or you want to benefit your favorite relatives, you can gift either appreciated shares or loser shares depending on the circumstances.
Give appreciated shares directly to charities for a double tax break: you’ll avoid capital gains tax while taking a deduction for the full market value of the stock. The same goes for gifts to relatives, except you won’t get a deduction. If you want to gift losing shares to a charity or relatives, sell the shares first to capture the capital loss for your use and then gift the proceeds.
5. Convert your IRA into a Roth IRA
Looking ahead to your retirement, if you expect to be in the same or higher tax bracket, you may want to consider converting to a Roth IRA now. Although you will take a tax hit by doing this now, you can shield your retirement assets from future tax increases.
6. Take advantage of the home sale tax exclusion
With home prices on the rise in most parts of the country, now might be the best opportunity to take advantage of the biggest tax break the tax code offers: A $500,000 tax deduction ($250,000 for single filers and married couples filing separately) off the sale of your primary residence. To qualify, you need to have used the home as your primary residence for two years of the five-year period leading up to the sale date. Be sure to talk to your real estate CPA before selling your home.
7. Review your estate plan
The big increase in the unified federal estate and gift tax exemption gives your estate an $11.4 million cushion in 2019 ($22.8 million for married couples). While that may give your estate more cushion than it currently needs, it’s still a good idea to review your estate plan to ensure it takes full advantage of the new rules. Please note, if your assets are below this threshold, you may still be subject to state estate tax.
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