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How to Tally Up Some Savings During the 12 Days of Tax-Mas

As you’re counting down the days of the holiday season, count on these year-end tax planning strategies to make your tax season just as merry. By Daniel F. Rahill, CPA, JD, LL.M., CGMA | Digital Exclusive - 2019

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Waiting until the final months of the year to do individual tax planning is an annual event for many of us. We’ve now had the past year to assess the impact of last year’s tax reform bill and to understand how our tax situation was affected. We check our withholding, add up our capital gains and losses, and check our list of charitable contributions and tax deductions we haven’t yet funded. We count down the days until the end of the year, investment advisor and CPA on speed dial, checkbook in hand and pen ready to make our final year-end tax moves.

To help you get ready for tax-savings season, let me share my 12 favorite 2019 year-end tax planning strategies.

Day 1


On the first day of planning, check your year-to-date withholding and review your 2018 tax returns to get a sense of where you stand and what tax bracket you will fall into. Ordinary income is taxed at seven different rates and is dependent on your amount of income, and capital gains are taxed at different rates than ordinary income. It’s important to understand your marginal tax bracket as you plan your tax strategy over the next 11 days.

Day 2


On the second day of planning, consider your future tax situation. Is your 2020 tax bracket likely to be higher or lower than 2019? If you expect to be in a lower future bracket, consider accelerating future deductions into 2019 and deferring income into 2020. Conversely, do the opposite if you expect your tax bracket to increase. Given the political and economic landscape, current tax rates are likely to be at their lowest for years to come.

Day 3


On the third day of planning, look at your retirement planning. For 2019, the maximum 401(k) or 403(b) contribution amount is $19,000 (persons age 50 and older can contribute an additional $6,000). Here again, understanding your tax bracket is important as it helps determine your tax savings, including whether to consider a Roth 401(k) or Roth IRA conversion. Roths have several advantages; while your 2019 contributions won’t be tax deductible, your money grows and can be withdrawn tax-fee. In addition, unlike a traditional IRA, you can continue to fund a Roth IRA after age 70-1/2, and you never have to take required minimum distributions from a Roth. A Roth conversion should be considered in a year of lower income when your marginal tax bracket is lower. Spreading a Roth conversion over several years to avoid higher tax brackets is another sound strategy. Finally, from a timing perspective, you have until April 15 of the new year to fund your IRAs.

Day 4


On the fourth day of planning, consider your capital gains and losses. Taxpayers can deduct a net capital loss of $3,000 per year, while the excess carries over to future years. While short-term capital gains are taxed as ordinary income, net long-term capital gains are taxed at one of three rates of up to 20 percent depending on your income and filing status. It therefore may make sense to realize capital gains in low income years and reinvest at a stepped-up tax basis to reduce future capital gains.

Day 5


On the fifth day of planning, consider Opportunity Zone investments to shelter your capital gains. Investing any portion of your capital gains into a qualifying project through a “qualified opportunity fund” (QOF) provides three significant tax benefits: investors’ capital gains are deferred until the QOF is sold or until December 31, 2026; investors receive a step-up in basis of 10 or 15 percent of the original capital gain depending on a five- or seven-year investment period; and if the QOF is held more than 10 years, the investors pay zero capital gains taxes on the appreciation of their investment. These benefits are attractive for long-term investors with large capital gains. Consider, however, that your capital gains must be reinvested in a QOF within 180 days. So, capital gains that pass through a partnership or are the result of netting of business asset sales that are deemed sold on the last day of the year, the taxpayer has until late June of the following year to make the QOF investment to meet the 180-day requirement.

Day 6


On the sixth day of planning, examine your medical deductions. In 2018, the floor for medical deductions was 7.5 percent of adjusted gross income (AGI) but this has increased to 10 percent of AGI in 2019. Therefore, if you cannot reach the threshold in 2019, consider a bunching strategy where you defer controllable expenses to a tax year where exceeding the 10 percent threshold is possible.

Day 7


On the seventh day of planning, it’s time to think of others—like children’s taxes. Starting in 2018, children’s unearned income over $2,200 is taxed at trust and estate tax rates. In some cases, depending on the level of income being taxed, this “kiddie tax” can result in higher taxes than if that income had been taxed at individual tax rates. However, 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 income being reported.

Day 8


On the eighth day of planning, consider my favorite strategy—electing to participate in a very tax savvy health savings account (HSA). Some call this a turbo-charged IRA because it offers three tax savings benefits. First, contributions are currently tax deductible. Second, the earnings on your contributions compound tax-free. Third, withdrawals are tax-free when the money is withdrawn for medical expenses. If you happen to work for an employer that makes HSA contributions as an employee benefit, consider that a bonus. In addition, after age 65, withdrawals can be used for non-medical expenses as well. If your annual medical expenses are low now, an HSA could act as a form of long-term care insurance later in life as the balance grows tax-free and can be used in retirement. To contribute to an HSA, you must be enrolled in a high-deductible health insurance plan. Also consider that the 2019 HSA contribution limit is $3,500 for an individual and $7,000 for a family. An additional $1,000 contribution can be made if you are age 55 or older. 2019 tax-year contributions can be made up until April 15, 2020.

Day 9


On the ninth day of planning, focus on education. 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 undergraduate work. Be aware that this tax credit completely phases out for married couples with modified adjusted joint income of $180,000 or more. Other potential education tax credits include the Lifetime Learning Credit of up to $2,000, which is not limited to undergraduates or full-time students, and ABLE credits for family members with special needs. Finally, while 529 savings plans won’t currently reduce your federal taxes, they provide tax deferred income growth and more than 30 states, including Illinois, allow a deduction of at least a portion of the 529 contributions from state income taxes. A 529 plan account can be used toward elementary, secondary, and college education expenses.

Day 10


On the tenth day of planning, it’s time to focus on the long term—transfer tax planning. You want to provide future financial security for your family, right? The 2017 tax reform law made significant transfer tax changes by temporarily increasing the lifetime exemption amount by double for tax years 2018 through 2025. Indexed for inflation, in 2019 you may give up to $11.4 million ($22.8 million for married couples) of assets over the course of your lifetime without incurring a gift or estate tax. After 2025, this amount will revert to one-half of this amount (adjusted for inflation). Because the IRS has confirmed there will be no “claw back” of gifts after 2025, this presents a unique planning window of opportunity for taxpayers to transfer significant assets to their heirs tax free.

Day 11


On the eleventh day of planning, consider annual giving. In 2019, a taxpayer can give up to $15,000 ($30,000 for married couples) per recipient without making a taxable gift. This annual gift exemption is also indexed for inflation. In addition, you can pay for someone’s tuition or medical expenses without those funds being subject to gift tax. This is a favorite gift strategy of grandparents. Note, however, that these payments must be made directly to the service provider to qualify for the exclusion.

Day 12


On the twelfth day of planning, it’s finally time to be philanthropic (while reducing your taxes at the same time). When donating items such as clothing, kitchenware, or furniture, your deduction is based on the item’s fair market value (i.e., what it might sell for at the thrift or consignment shop). You need a written acknowledgement from the charity for contributions of $250 or more. For donated items valued at more than $5,000, such as art, antiques, or an automobile, you will need a written appraisal. If you’re age 70-1/2 or older, you can give up to $100,000 from a traditional IRA directly to a charity as a required minimum distribution. This is an important planning opportunity for seniors who wish to keep their income below the Medicare high-income surcharge threshold and lower the percentage of Social Security benefits subject to tax. Finally, from a timing perspective, contributing to a donor-advised fund allows you to bunch your deductions into one year, enabling you to itemize in years where you otherwise couldn’t.

As you’re considering these 12 planning strategies, there’s a good chance you’ll hear a holiday song with a similar theme. Just remember, if you follow the 12 days of tax planning, April 15 will be very merry indeed.

Illinois CPA Society member Daniel F. Rahill, CPA, JD, LL.M., CGMA, is a managing director at Wintrust Wealth Services. He is also a former chair of the Illinois CPA Society Board of Directors.

Disclosure: This information may answer some questions, but is not intended to be a comprehensive analysis of the topic. In addition such information should not be relied upon as the only source of information, competent tax and legal advice should always be obtained. Securities, insurance products, financial planning, and investment management services offered through Wintrust Investments LLC (Member FINRA/SIPC), founded in 1931. Trust and asset management services offered by The Chicago Trust Company, N.A. and Great Lakes Advisors LLC, respectively. Investment products such as stocks, bonds, and mutual funds are: NOT FDIC INSURED | NOT BANK GUARANTEED | MAY LOSE VALUE | NOT A DEPOSIT | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY.