As we approach the end of 2019, it is a good time to consider several strategies that may help with your tax situation.
Optimum tax planning includes developing and actioning current, short-term, and long-term strategies to achieve the most effective results. The Tax Cuts and Jobs Act (TCJA) brought major tax law changes in 2018 to individuals and businesses. It introduced new tax rates and brackets and created, eliminated and modified various deductions. To date, 2019 has not delivered major tax law changes.
Manage Taxable Income to the Tax Brackets:
The 2019 individual federal income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% have not changed from 2018. The 2019 tax brackets based on filing status and indexed to account for inflation are as follows:
|Rate||For Unmarried Individuals, Taxable Income Over||For Married Individuals Filing Joint Returns, Taxable Income Over||For Heads of Households, Taxable Income Over|
2019 Long-term capital gains and qualified dividends are taxed differently from ordinary income using the following brackets and rates:
|Long-Term Capital Gains Tax Rate||Single Filers (taxable income)||Married Filing Jointly||Heads of Household||Married Filing Separately|
|0%||$0 – $39,375||$0 – $78,750||$0 – $52,750||$0 – $39,375|
|15%||$39,376 – $434,550||$78,751 – $488,850||$52,751 – $461,700||$39,376 – $244,425|
|20%||Over $434,550||Over $488,850||Over $461,700||Over $244,425|
The Net Investment Income Tax (NIIT) is a 3.8% surtax on a portion of modified adjusted gross income over certain filing status-based thresholds. Net Investment Income includes interest, dividends, capital gains, non-qualified annuity distributions, income from passive investment activities, etc.
|2019 NIIT Thresholds|
|Your Filing Status||Threshold Amount|
|Married Filing Jointly||$250,000|
|Married Filing Separately||$125,000|
|Head of Household (With Qualifying Person)||$200,000|
|Qualifying Widow(er) With Dependent Child||$250,000|
Each taxpayer’s planning opportunities will be based on their specific facts and circumstances. First and foremost, it is important to know what bracket you are in or are projected to be in. The long-standing strategies of deferring income and/or accelerating deductions to lower taxes will continue to be effective for many taxpayers; however, at times, accelerating income or deferring deductions may allow a taxpayer to maximize the benefit of a lower tax bracket. This process can be very helpful in managing annuity and retirement income to minimize taxes over time. Also, consider harvesting long-term capital gains if you can benefit from the 0% or 15% capital gain rates and/or stay below your NIIT threshold.
Contributions to Retirement Accounts: You may be able to reduce your taxes by contributing as much as you can to IRAs and employee retirement plans. These contributions are subject to the following limits:
IRA Contributions: The maximum you can contribute to all your traditional and Roth IRAs for 2019 is $6,000 ($7,000 if you are 50 or older). Remember, you can make contributions to your IRA until April 15, 2020 for the 2019 tax year.
401(k) Contributions: The 2019 employee deferral limit on 401(k) contributions is $19,000 (plus an additional $6,000 if you are 50 or older).
Required Minimum Distributions (RMD): Owners of Traditional IRAs who are age 70 ½ or older must take their 2019 RMD by December 31, 2019 to avoid a penalty. You must take your first RMD by April 1st of the calendar year after you turn 70 ½. Please note, should you choose to delay your first RMD until April 1st, you will also need to take that year’s RMD by December 31st, thus both distributions will count as income for that calendar year.
If you have any additional retirements accounts outside of our management, please notify us immediately so that we can ensure that all applicable accounts are included in you RMD calculation.
Roth Conversion: Determine if a traditional IRA should be converted to a Roth IRA. Factors to consider include your current and future anticipated tax status, family situation, and the ability to pay the tax due from other sources. High income earners might consider a “Backdoor” Roth IRA. This is an IRS sanctioned method that may enable taxpayers to fund a Roth even if their income is over the regular Roth contribution limits.
Tax Loss Harvesting: At NEIRG, we monitor taxable portfolios throughout the year for available losses. Depending on your tax situation, it may be beneficial to purposely “harvest” investment losses to offset capital gains that have been realized during the year (reminder: this only applies to taxable accounts). Keep in mind that net losses up to $3,000 can offset income and any further losses can be carried forward to future years.
Gifting: Gifting, to either family or charities, can reduce your taxable estate.
Charitable Gifting: In addition to reducing your estate, charitable gifting can lower your taxable income. In order to take advantage of the benefits of charitable gifting, you must itemize deductions on your tax return and the gift must meet the IRS guidelines. Gifts made by December 31, 2019 may be deductible on your 2019 tax return. Please consult with us if you are planning on making charitable gifts so that we can help recommend an appropriate gifting method (i.e. cash, property, or appreciated securities).
Those who are 70 ½ or older can transfer their 2019 RMD to charity (up to a $100,000 limit per person). While the donation counts as your RMD, it does not increase your adjusted gross income. This can be particularly helpful if you do not itemize and cannot deduct charitable contributions. It can also help to avoid the Medicare high-income surcharge or reduce the taxable portion of your social security benefits.
Personal Gifting: For 2019, you may gift up to $15,000 a year per recipient without gift tax consequences (this equates to $30,000 for married couples). The lifetime exclusion amount for gifts is $11,400,000 for 2019.
There are many other tax planning strategies that may be applicable to your situation; however, we hope that the above methods are helpful as you plan for the remainder of the year. Please feel free to reach out to us if you would like to discuss your specific circumstances or if we can be of further assistance.
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