December doesn’t feel like tax season, but year-end is one of the best times to consider your tax situation since many tax-saving strategies require action before December 31st. Once April arrives it is often too late to impact your tax situation and your CPA is simply recording what happened way back in 2019. By taking action now, you can take advantage of many of the best ways to save. Here are some steps you should consider now so that you can save come April.
What should you do if your 2019 income is higher than normal?
Did you get a big bonus, receive significant severance pay? Is your business doing better this year than in the past? Here are some ideas for reducing your taxable income and advancing deductions:
1. Maximize your 401k deductions. This is one of the first and best ways to reduce taxable income. The maximum contribution for 2019 is $19,000 for those under 50 and $25,000 for those 50 and older. Increasing those contributions for the remainder of the year can significantly reduce your tax due.
2. Maximize your charitable contributions. If you are charitably minded then one of the best ways to reduce taxes is to give. Don’t know who to give to? You can contribute to a Donor Advised Fund, get the tax deduction this year, and then select the final charities in the years to come. This strategy is especially effective when you have a one-time spike in income.
What should you do if your 2019 income is lower than normal?
Did you get laid-off, retire to a much lower income, or have a loss this year? Make the most of your lower tax bracket by considering the following:
1. Convert some of your traditional IRA to a ROTH IRA. Converting part of your traditional IRA to a ROTH IRA requires that you pay taxes on the converted amount. What better time to make the conversion than in a year with lower income? Paying a small amount of tax now can save you thousands in the long run.
2. Harvest capital gains. Many investors have unrealized gains from the bull market of the last few years. Harvesting these capital gains can make sense in many situations, but can be especially helpful when your income is lower than normal. In fact, the federal capital gains rate is 0% for those in the 10% and 15% brackets (up to $78,750 in taxable income for 2019 for a married filing jointly taxpayer). Having a low-income year is a significant opportunity that shouldn’t be missed.
There are many other strategies to help your tax situation, but these are some of the best ways to get started. One of the best ways to make money is to pay less to Uncle Sam. If you would like to discuss your situation, please give us a call.