CHICAGO, December 18, 2019 – As the clock ticks down to the new year, time is running out for taking advantage of tax planning strategies, like these from the Illinois CPA Society, that may extend your holiday joy well into 2020.
Bunch Your Charitable Contributions – Accelerating your charitable contributions is known as a “bunching” strategy, where taxpayers combine two or more years’ worth of charitable contributions into one tax year to take advantage of a higher tax-deduction than what the standard deduction would offer. The following year, that taxpayer would take the standard deduction, receiving a larger tax break over a two-year cycle than taking the standard deduction each year.
Capitalize on Retirement Planning – Tax-deductible contributions to traditional individual retirement accounts (IRAs) can be made up until the April 15, 2020 filing deadline. And for the 2019 tax year, the maximum 401(k) or 403(b) contribution is $19,000, and investors ages 50 and older may contribute an additional $6,000. Roth IRA contributions shouldn’t be overlooked—while not tax deductible, future withdrawals are tax-free.
Consider Medical Expenses – The threshold for medical expense deductions increased to 10 percent of adjusted gross income (AGI) in 2019 and could go up more in 2020. If your total medical spending will fall short of your 10-percent-of-AGI threshold for this year, consider whether you can accelerate some expenses into this year or defer others to next year (another form of bunching) to have a better chance of taking a medical expense deduction.
Get “Schooled” on Education Tax Breaks – If you are a parent or grandparent, you can take the American Opportunity Tax Credit (worth up to $2,500 per student) for your students who are in their first four years of college or other post high-school education. Another education tax credit is the Lifetime Learning Credit of up to $2,000, which is not limited to undergraduates or full-time students.
Navigate the “Kiddie Tax” – Children’s unearned income over $2,200 is taxed at trust and estate tax rates, which may result in higher taxes than if the same income was taxed at individual tax rates. If your child is under age 19, or is a full-time student under age 24, and both your child and you meet certain qualifications, you can elect to report your child’s income on your tax return, which could reduce overall taxes depending on the level of reported income.
Avoid Gift Taxes – For 2019, you can make a tax-deductible charitable contribution of up to $15,000 ($30,000 for married couples) without it being considered a taxable gift. That also includes paying someone’s school tuition or medical expenses, but payments must be made directly to the service provider to qualify.