With the holiday season approaching and the end of 2019 right around the corner, we would like to highlight five last minute tax tips. You have until the end of the year to tackle these tasks which can help maximize your tax benefits and improve your overall financial plan:
- Maximize 2019 contribution to your employer-sponsored retirement plan:
Your 2019 taxable income will be reduced by the amount of tax-deferred contribution that you put in your retirement account during the year. For 2019, the maximum amount that you can contribute to 401k, 403b, and 457b accounts is $19,000 ($25,000 if you are age 50 or over). For SIMPLE plans, the limit is $13,000 (if you are age 50 or over, it is $16,000).
- Set up 2020 contribution amount for your employer-sponsored plan:
For 2020, the maximum deferral amount for 401k, 403b and 457b plans increase to $19,500 and the age 50 and over “catch-up” contribution increases to $6,500. If you don’t want to have to set aside a big chunk of money to maximize your retirement plan contribution at the end of next year, change your contribution election now. If you are on a regular bi-weekly pay schedule, here are the amounts that you need to defer from each paycheck to max out your 2020 contribution by year-end:
|Account||If you are under age 50||If you are age 50 or over|
|401k, 403b, 457b||$750 per paycheck, to max out annual contribution at $19,500||$1,000 per paycheck, to max out annual contribution at $26,000|
|SIMPLE IRA||$519.23 per paycheck, to max out annual contribution at $13,500||$634.62 per paycheck, to max out annual contribution at $16,500|
- Tax loss harvesting
This is a key year-end strategy, where you choose to sell off positions with unrealized losses to offset other capital gains that you had during the year. Losses offset gains dollar-for-dollar. If your capital loss amount ends up more than your capital gains, up to $3,000 of excess loss can be used to offset other income. And if you have more than $3,000 in excess loss, the remaining amount can be carried forward to future years.
- Take your RMDs
You must begin taking required minimum distributions (RMDs) from your IRA account(s) when you reach age 70 ½, otherwise you’ll pay a hefty penalty to the IRS. Except for the first year, when your RMD must be taken by April 1st of the year after you turn 70 ½, subsequent RMDs must be taken by December 31st of each year. The penalty for failing to take a distribution on time is 50% of the RMD amount. RMDs are required for traditional, SIMPLE, and SEP IRA accounts.
- Consider Qualified Charitable Distributions
Since taking required minimum distributions from traditional IRAs is mandatory even if you don’t want or need the money at the time, one way to avoid paying income tax on the distributions is to take Qualified Charitable Distributions (QCDs). QCD is a distribution from a traditional IRA made directly to an eligible charity, bypassing the IRA account’s owner. For those charitably minded, QCD is a good way to distribute the minimum required amount out of the IRA, avoid paying 50% excise tax penalty, and avoid paying income tax on the distribution.
Bonus: Do house-keeping tasks to prepare for 2019 tax season
Begin preparing for your 2019 tax returns by:
- Downloading all monthly bank statements for 2019, since many banks only offer online statements for the most recent 12 months. Once 2019 is over, it might be a hassle for you to obtain older statements. This is especially necessary when you have self-employment income and your tax preparer needs to look for deductible expenses in those statements.
- Writing down your car mileage on the last day of the year. Keep doing this every year to have a good record of total mileage that you drive each year, which will be beneficial to determine certain deductions for your tax return.
joined Fifth Set Investment Advisors in 2019. Her areas of expertise include operations, financial planning, tax planning and preparation and investment management. She graduated Summa Cum Laude from the University of Texas at Dallas with BS degrees in finance and accounting. Ashley is a CFP® professional as well as a federally authorized Enrolled Agent of the IRS. Ashley brings her positive and passionate attitude to bear on helping clients of Fifth Set achieve their goals.