Tax-Saving Checklist

11/22/2019 9:16 am EST

Focus: TAXES

Marvin Appel

President, Signalert Asset Management LLC

As we are nearing yearend, Marvin Appel shares important tax tips that can save you big time.

Now that Thanksgiving is almost upon us, this is a good time to make sure you have done everything you can before the end of the year to minimize taxes. Here are some things you should look for:

  • Gifts: Individuals can give up to $15,000 per recipient in 2019 without filing any federal gift tax returns or owing any federal gift tax. That means that a married couple can gift $30,000 to each of their heirs. Estates of $11.4 million won’t owe Federal estate tax (at least through 2025), so this is an issue for only the wealthiest families. However, many states such as New York have much lower limits on how much you can leave before owing estate taxes. Most states with estate taxes don’t have gift taxes (sorry, Minnesota and Connecticut), so making gifts during your lifetime can reduce your state tax burden. Also, there is always a chance that the Federal estate tax exemption will be reduced, depending on the outcome of the 2020 election. 
  • 401(k) and IRA contributions: Make sure that you have contributed enough to your 401(k) to take full advantage of employer matching funds. You must do this before the end of the year. In contrast, you have until April 15, 2020 to make an IRA contribution for 2019.
  • Capital gains: Because the markets have gone almost straight up this year, investors will likely enjoy significant unrealized gains by yearend. If possible, defer realizing gains until next year. If you feel sure that it is unsafe to wait until 2020 to realize your gains, certain hedging strategies may allow you to lock in your profits (or at least most of them) without generating a taxable event. If you are looking to add to positions in a mutual fund, first check out its anticipated capital gains distribution. If the fund’s distribution is significant, wait until the ex-date before buying the fund. Conversely, if you are thinking of selling shares held more than a year, sell before the ex-date so that the entire profits count as long-term gains rather than the mixed bag of taxable distributions that the fund may generate.
  • 529 plan contributions: Some states (New York, for example) allow a state income tax deduction for contributions to a 529 plan. In addition, investment gains on 529 plan accounts are never taxed if they are used for allowed educational expenses. Especially if you already have a student in college, make sure to take advantage of any state tax deduction to which you might be entitled. 
  • Roth IRA conversions: If 2019 is a year when your income is unusually low—lower than you expect it to be in retirement — consider converting some of your IRA assets into a Roth IRA. That will entail paying taxes when your tax bracket is temporarily depressed rather than when required distributions would otherwise be required.
  • Obamacare subsidies: If you have a health plan through the Affordable Care Act and have the flexibility to defer or advance income into different tax years, you might find it advantageous to arrange for some years of reduced income in order to qualify for subsidies that you might not receive if your income was level from year to year. This depends on how much you are making and how many family members you are supporting. 
  • College financial aid: You have to look ahead because your 2019 income will be reported on the 2021-2022 FAFSA (financial aid form). Colleges look at available assets when determining financial aid awards, but not all assets are viewed equally. Cash in the bank is viewed as more available than home equity, so pre-paying your mortgage or paying off other debts might qualify your child for more financial aid than if you maintain a large emergency cash reserve. You might also help yourself by making big ticket purchases that will last you a long time.

For example, if your house needs a new roof you might be better off taking care of that before financial aid officers begin assessing your ability to pay for college. Similarly, if you have the opportunity to contribute more to your 401(k) plan, those assets will not be assessed in determining financial aid. It is paradoxical that spending down your cash before incurring one of the biggest financial burdens of your family’s life might be helpful, but that could be the case.

  • Business deductions: Depending on whether your income in 2019 is likely to be unusually high or low, you should consider which tax year to deduct certain expenses where you have the flexibility to decide. If 2019 has been an above-average year for you, consider making purchases or paying bonuses before Dec. 31 that you might otherwise wait until 2020 to complete. 
  • Charitable contributions: Taxpayers are not as likely to be able to deduct these after the new tax law because so many other deductions have been removed that it rarely pays to itemize. However, the philanthropically minded can make a large lump sum contribution to a donor advised fund (such as Vanguard’s or offerings from certain large charities). Then you can make ongoing contributions to your favorite charities from the lump sum you contribute this year. Forming your own little charitable trust in this way might allow you to get more of a tax deduction than you would if you made more modest gifts year by year. For married couples filing jointly, you would need $24,000 in itemized deductions in any one year for you to get any tax deduction. However, for single filer in a high-tax state, you are likely to pay $10,000 in state and local taxes so charitable contributions above $2,000 could make it worth itemizing and claiming a tax deduction. However, that is not really the point.

These are all potentially complicated issues. Before taking any steps, consult your personal tax, investment, legal or other qualified advisor to plot the best course of action for you. Our money management clients are welcome to call me to discuss their year-end financial strategies.

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Tax-Saving Checklist
11/22/2019 9:16 am EST

As we are nearing yearend, Marvin Appel shares important tax tips that can save you big time....