It’s smart to look at ways you might minimize your tax liability. That’s especially true for 2019, the second year the sweeping new tax legislation (commonly known as the Tax Cuts and Jobs Act) generally applies. In light of the new income tax rates and significant changes to traditional deductions, it’s particularly important to speak with your tax advisor. Speak with them about some or all of the following ideas.
1. Decide whether itemizing is still for you
The new law greatly increases the standard deduction to $24,400 for married couples filing jointly, $12,200 for single filers in 2019. It also places new limits on itemized deductions, including a $10,000 cap on property and state and local income tax deductions. Taking the standard deduction instead of itemizing may well make tax preparation simpler. At the same time, work closely with your tax specialist to make sure it’s the right choice, which will depend on factors ranging from your health expenses to charitable giving (see tips 4 and 8).
2. Max out on your retirement plan
The new laws don’t change this advice: Think about increasing your contributions to your 401(k), IRA, or other retirement plan to reach the maximum contribution amount.
401(k) 2019 contribution limits
401(k) 2019 contributions limits: $19,000 for persons under age 50; $25,000 for persons turning 50 or over any time during the tax year.
*Applies to individuals who turn 50 or over at any time during the tax year.
Not only does this offer the possibility of increasing your retirement savings, but it will also potentially lower your taxable income. If you’ll be age 50 or older at any time during the calendar year, take advantage of “catch-up” contributions (an extra $6,000 for a 401(k) plan and an added $1,000 for an IRA. You generally have until Dec. 31, 2019, to contribute to a 401(k) plan and until April 15, 2020, to contribute to an IRA for the 2019 tax year.
3. Consider converting your traditional IRA to a Roth IRA
Although there are income limits for contributing to a Roth IRA,Footnote 2 anyone can convert all or a portion of their assets in a traditional IRA (or other eligible retirement plan) to a Roth IRA. Why might doing so make sense? Unlike with a traditional IRA, qualified distributions from a Roth IRA aren’t generally subject to federal income taxes, as long as the Roth IRA has been open at least five years and you have reached at least age 59½. However, you’ll be required to pay income taxes on the amount of your deductible contributions, as well as any associated earnings, when you convert from your traditional IRA to a Roth IRA — or, if you don’t convert, when you retire and take withdrawals from your traditional IRA.
Depending upon your particular situation, it could be beneficial to convert from a traditional IRA to a Roth IRA and pay taxes now, rather than holding the funds in the traditional IRA and paying taxes upon distribution at a later date. Use our IRA Conversion Calculator to help you make a decision. Consult with your tax advisor to see which might suit your circumstances better.
4. Cover health care costs efficiently
Both Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) could allow you to sock away pretax contributions for qualified medical expenses your insurance doesn’t cover.
How do health accounts compare?
contribution limits for 2019 Under age 55 and over Age 55
Health Savings Account (HSA) Individual $3,500 $4,500
Health Savings Account (HSA) Family $7,000 $8,000
Health Flexible Spending Account (FSA) Individual $2,700 $2,700
But there are key differences to these accounts. Most notably, you must purchase a high deductible health insurance plan and you cannot have disqualifying additional medical coverage, such as a general purpose FSA in order to take advantage of an HSA.
One important benefit of HSAs is you don’t have to spend all the money in your account each year. Though some employers allow you to roll over as much as $500 in FSA funds from year to year, generally, the funds you contribute to an FSA must be spent during the same plan year.
Also, while you can deposit funds into an HSA up to the tax filing due date in the following year up to the maximum dollar limit and still receive a tax deduction for the current tax year (e.g., you can make your 2019 contribution by April 15, 2020), FSA contributions are generally only elected during open enrollment or when you become an employee of a company.
Be sure to check your employer’s rules for FSA accounts. If you have a balance, now may be a good time to estimate and plan your health care spending for the remainder of this year. In addition, see if the account balance can be used to reimburse you for qualified medical costs you paid out-of-pocket earlier in the year.
5. Use stock losses to offset capital gains
Now may be a good time to consider selling certain under performing investments in order to generate a capital loss before the end of the year — which could help offset the capital gains you realize when selling stocks that are performing well. In addition, you may generally deduct up to $3,000 ($1,500 if married and filing separately) of capital losses in excess of capital gains per year from your ordinary income. If your net capital losses exceed the yearly limit of $3,000 ($1,500 if married and filing a separate return), you can carry over the unused losses to the following year. Note that under the new law, investors will continue to pay long-term capital gains taxes at a rate of 0%, 15% or 20% (depending on their overall income), but with adjusted cutoffs. Married couples filing jointly and earning $78,750 or less ($39,375 or less for singles) will pay 0%. Married couples filing jointly earning between that and $488,850 (or that and $434,550 for singles) will pay 15%, while married couples filing jointly and earning more than $488,850 ($434,550 for singles) will pay 20%.Footnote 4
6. Fund a 529 education savings plan
By putting money into a 529 education savings plan account, you can give a tax-free gift to a beneficiary of any age. Generally, you can make a gift of up to $15,000 per beneficiary annually ($30,000 from a married couple electing to split gifts) without having to fill out the federal gift tax form. You may also be able to contribute up to five years’ worth of gifts ($150,000 from a married couple electing to split gifts) per beneficiary in one year, as long as no other gifts are made over that period.Footnote 5
Under the new tax laws, 529s may also be used to pay up to $10,000 of tuition annually for the beneficiary’s enrollment or attendance at a public, private or religious elementary or secondary school, free from federal income taxes.Footnote 6 But because 529s are most effective when your investment has years to grow, they may be less beneficial for paying elementary or secondary school tuition than for college expenses.
7. Make tax-free gifts
You can give as many family members as you like up to $15,000 per year ($30,000 from a married couple electing to split gifts) each without reporting it to the IRS. Generally, once the gift is made, your estate will not pay estate taxes on it, and it will not be considered taxable income for the recipient. Also, the lifetime federal gift and estate tax exemption has more than doubled, to $11.40 million for individuals ($22.80 million for married couples), meaning far fewer estates will owe estate tax. Read “Should You Give Your Kids an Early Inheritance?” — and check out Tip 6, above — for even more family giving ideas.
Yearly gift limits
per beneficiary per year
Yearly gift limits per beneficiary: $15,000 for individuals and $30,000 for married couples.
8. Donate to your favorite charity
Charitable gifts, such as cash or appreciated stock, are still tax-deductible if you itemize, but not if you take the standard deduction. If you give regularly to charities, consider putting several years’ worth of gifts into a donor-advised fund (DAF) for a single year — that step may make it worth your while to itemize. “Then, you can spread out the giving from the DAF over the next several years, based on your charitable intent.”
Another change: Taxpayers who itemize can now deduct cash charitable contributions of as much as 60% of their adjusted gross income, up from 50%. That could work to the benefit of, say, a retired person with significant assets and modest living expenses.