1. Planning pays off
Effective planning gives you a good understanding of your current tax situation, as well as a reasonable estimate of how your situation may change in the next year. Think about the opportunity for tax savings if you’ll be paying taxes at a lower rate in one year than in the other. Remember, most tax-saving moves close on December 31, so don’t put this off.
2. Do you have income that you can defer?
There may be opportunities to defer year-end bonuses, business expenses or debts, payments for services, etc. Consider opportunities to defer income to 2020, particularly if you think you may be in a lower tax bracket then. Doing so may enable you to postpone payment of tax on the income until next year.
3. Don’t forget the alternative minimum tax (AMT)
If you’re subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows several itemized deductions. For example, if you’re subject to the AMT in 2019, prepaying 2020 state and local taxes probably won’t help your 2019 tax situation but could hurt your 2020 bottom line. Determining whether you may be subject to the AMT before you make any year-end decisions could help you avoid costly mistakes.
4. Accelerate deductions
Look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as healthcare costs, qualifying interest, and your state taxes before the end of the year (instead of paying them in early 2020) may difference on your 2019 return.
5. Increase withholding to cover shortfalls
If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer to increase your withholding for the remainder of the year to cover the shortfall. This strategy can also be used to make up for low or missing quarterly estimated tax payments. With all the recent tax changes, it may be especially important to review your withholding in 2019. The biggest advantage to this is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck.
6. Take any required distributions
Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
7. Maximize retirement savings
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2019 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.
8. Beware the net investment income tax
Don’t forget to account for the 3.8% net investment income tax. This additional tax may apply to some or all your net investment income if your modified adjusted gross income (AGI) exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if the head of household).
9. Year-End Investment Decisions
Don’t tax considerations drive your investment decisions. Consider the tax implications of any year-end investment moves that you make, such as if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
10. You’re not alone, get help!
There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who can evaluate your situation and help you determine if any year-end moves make sense for you.
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