Will you need to do any last-minute shopping this holiday season? I do.
Below are 5 last-minute strategies that could reduce your 2019 tax bill (i.e. ideas that could reduce your tax bill or increase your tax return) and help pay for those holiday gifts.
DISCLAIMER – Before you read our article about strategies to help you save you money and potential tax-related headaches, my compliance team wants you to know that I’m not an accountant. Make sure to discuss any strategies and questions about these ideas with your accountant or tax professional.
- Make a Tax-Deductible Contribution to a Traditional IRA, or SEP IRA Contributions
One way to lower your tax bill (or increase your tax return) is to make a tax-deductible contribution to a retirement account such as a Traditional IRA or a SEP IRA (for business owners).
Traditional IRA – The maximum contribution for traditional IRA accounts in 2019 is $6,000 per person and $7,000 if you are over age 50. You can make contributions through the deadline (April 15, 2020).
For your contribution to be deductible, you just need to meet the IRS requirements. This deduction is allowed in full if you are not covered by a work plan.
You may not be eligible to deduct your contribution if you (or your spouse if married) are covered by a plan at work. Click here to see if you may qualify for an IRA deduction.
SEP IRA – Business owners can make contributions to a SEP IRA by the tax deadline (April 15, 2020) or as late as 10/15/2020 if they file an extension. This can help if you don’t have the cash now to contribute, or if you will have the funds available to contribute by the deadline.
- Increase the Amount You are Saving into Your Company-Sponsored Retirement Plan (e.g. 401k, 403b, SIMPLE IRA, 401a, etc)
You likely have one last paycheck for the year. If you were in the 32% tax bracket, you could reduce your tax bill by $320 if you put away $1,000 of your last paycheck into your company retirement plan.
Unless you live in one of the seven states that don’t hit you with income tax, this strategy can reduce your state tax bill as well.
If you have not maxed out your company plan contributions ($19,000 for a 401k or 403b) or the catch-up contribution ($6,000 if over 50) this year, there could still be time to make an adjustment for your last paycheck of the year!
- Make a Charitable Contribution
If you care about a charity and have some extra cash or investments you do not need for retirement, this strategy can help you lower your tax bill while helping others. One downfall of this strategy is that it will not lower your tax bill if you will be taking the standard deduction.
If you will take the standard deduction in 2019 and itemize in 2020, you could be better off delaying your charitable contribution until January (or anytime) in 2020.
Do the terms “itemize” or “standard deduction” make your head hurt? Learn more about what they mean in this article, or talk to your accountant to determine how you should file your taxes for 2019.
Instead of giving cash, you could gift stock, or appreciated assets. Do you have stock or appreciated assets that you don’t need? Are you ahead of schedule to fund the goals in your financial plan (e.g. retirement, college, etc)? If so, gifting appreciated assets could be another way to reduce your tax bill. This article contains more information about gifting appreciated stock.
- Manage Education Bills or Contribute to a 529 Savings Plan
You may be able to reduce your tax burden by prepaying tuition or contributing to a 529 education account. The American Opportunity Tax Credit provides parents with a $2,500 tax credit for each qualifying student they help with tuition. To qualify, the student must be in the first 4 years of their undergraduate study.
With the spring semester coming soon, prepaying tuition before the end of the year could be a worthwhile move. It’s important to note that married couples with modified adjusted joint income of under $160,000 can claim the full amount, while those with up to $180,000 can only claim a partial amount.
While contributing to a 529 may not help you reduce your federal tax bill, it can help with lowering your state tax bill. Some states allow you to deduct 529 contributions if you are making the contribution to your home state’s 529 plan. Other states will even allow you to deduct contributions to any state’s 529 plan. You can learn more about your home state’s 529 plan by clicking here and selecting your home state. Source
- Take Your Required Minimum Distributions Before the End of the Year
“If you’re age 70 ½ or older, take your RMD now to avoid a big penalty.” Take note of how much you need to take in distributions for the year and keep track of how much you have already taken.
If you take less than the required amount, you could end up paying a penalty of 50% of the amount not distributed. It’s important to note that if you’re over 70 ½ and still working, you can delay RMDs from your 401k (if you don’t own more than 5% of the company).
Another option for your RMD is to transfer it directly to charity. This transfer is tax-free, even from a Traditional IRA. This transfer also does not add to adjusted gross income, which can be helpful if you are trying to stay below any type of income limits. Source
Does it feel like you don’t have enough time or money? Take the Dreams and Means Index to begin exploring opportunities to get more out of the time and the money that you have.
Learn how we can help you by connecting with us on our website.
What can you do in 2020 and beyond to reduce your future tax bill?
Stay tuned for a blog post that will be coming out in early 2020!