Year-end Tax Planning now races day by day and hour by hour. As December begins, year-end Tax Planning faces reality: there is only one month left in the year for tax planning.
But fear not, Gavrilov & Co can still bring you some year-end last-minute tips and reminders in this trusty blog. We know all kinds of other tax accountants are bringing you similar information, but the Tax Squad at Gavrilov & Co hopes you find these tips presented in such a clear, concise way that you run to your printer to copy them off. Then, make yourself a checklist to discuss with our tax-planning and business advisers. Because you see, although it’s late, it’s not too late to pack a little tax planning into 2019.
Year-end Tax Planning Panic
Where do I begin? This is often the question as you look at the year in dollars and cents. Glenn DiBenedetto is a CPA and director of tax planning at the New England Investment & Retirement Group. He gives you a starting point. And when you have a new business or a new family, that can be challenging. Don’t panic, he has your year-end tax planning key. And so does Gavrilov &Co: DiBenedetto states, “Tax planning should begin with gauging taxable income to tax brackets…” He Explains, “Establishing tax brackets is the first step in determining the most appropriate strategies…”
Know Your Bracket for Year-end Tax Planning
From this first step, you can still plan strategies, although Thanksgiving has marked the year as almost over:
- When you know your bracket, you can accelerate deductions,
- You can defer income.
Your established tax bracket is the first step for harvesting long-term capital gains. It’s easier than it sounds. To do this you will take your long term capital gains “under the Net Investment Income Tax threshold…”
Optimizing Year-End Tax Planning
Before you can take advantage of last-minute tax planning at the year-end, you must know your tax bracket.
- A typical long-term move is to defer income and accelerate deductions. This continues to be effective for many taxpayers.
- As often happens, there are exceptions to the above procedure. Believe it or not, the opposite is true for many in a lower tax bracket.
- You see, accelerating income and deferring deductions may allow the taxpayer to maximize the benefit of a lower tax bracket.”
- For more information on this, check out this excellent online resource.
The Year-End Tax Planning Secret to Annuities
It is essential to know your proper bracket before you can plan how to manage your annuities. Read on to see how this influences many details, even at the very end of the year.
The Last Minute Tax Planner’s favorite Question
Many new clients ask us, “Will moving into a higher Tax Bracket cause me to have a lower net income?” You see, a lot of tax clients fear that “when their income increases by enough to push them into a higher tax bracket, their overall take-home pay, or net pay, will decrease.” This is a completely incorrect assumption, a tax myth.
- The United States has a marginal tax rate system, and it works like this…
- An increase in income will shove you into a higher tax bracket…
- However, you “only pay the higher tax rate on the portion of your income that exceeds the income threshold for the next-highest tax bracket.”
Now…About Your Year-end Plans for those Annuities
Referring back to the annuities we mentioned above, many older tax-payers (let’s personalize this and say “you”) buy annuities. Then you and defer, defer, defer as years march on.
- Now, what you might misunderstand is that there will be no step-up for your beneficiaries when you die…
- They will have to pay tax at their bracket rate. That rate might be a lot higher than yours.
- Likewise, we see the same situation with the IRS. It makes year-end tax planning sense, to “take out some annuity income in a 10, 12 or 22 percent bracket when the beneficiaries are in the 37 percent bracket.”
- Some of our clients are amazed by this twist in the art of year-end tax planning.
Don’t Let The Zeros Blind You!
We know taxpayers love to “see the zeros on the tax due,’ but someone will eventually pay the tax.” So why not do some year-end planning to take out at least some of the income at a lower bracket?
Traditional Vs. Roth IRA: Year-end Tips
- It’s a star-studded fact that you might reduce your tax bill by contributing as much as possible to your IRAs and employee retirement plans.
- Year-end Tax Planning requires a professional. Our tax squad will pay special attention to the money you are saving for retirement. We can help you see if you should convert your traditional IRA to a Roth IRA.
Before factoring a Roth IRA into your year-end tax planning, we will consider many Factors:
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- Your current and future anticipated tax status,
- family situation,
- Your fiscal ability to pay the tax due from other sources.
- You might have heard about the “backdoor” Roth IRA. Even if your income is over the regular Roth contribution limits,” you might be permitted to fund a Roth in spite of your higher income. Be sure to talk about it with one of our tax professionals.
Harvesting Investment Losses at Year-end Tax Planning Session
Our tax Squad can show you how to harvest investment losses in a year-end tax planning session. Then you can use them to offset capital gains you have gotten during the year. Our expert of the
day, DiBenedetto noted, “Keep in mind that net losses up to $3,000 can offset income…”
And then he added, “…Any further losses can be carried forward to future years.” We think that’s some really cool year-end tax planning advice. We could help you see if it would work in your financial situation.
Year-end Gift Giving
No blog of Year-end tax planning tips, such as this one, would be complete without mentioning estate tax and gifting. Put simply, if your estate will potentially be subject to the estate tax, it’s a good time for gifting. Gift some of it to either family or charities. Thus, you will reduce the taxable estate. Plus, you might already know that charitable gifting will lower your taxable income.
2019 Rules for Charity
It might seem odd that there are rules for giving fine gifts, but tax planning requires care.
- In the first place, you must itemize deductions.
- You must give the gift by Dec. 31, 2019. (See, it is not too late!)
- Moreover, if you are a senior citizen of 70 and ½ years or more, you must “make a required minimum distribution.
- You can actually transfer your 2019 RMD to a charity. However, your charity is limited to a $100,000.00 limit.
Keep in mind that whereas the donation counts as RMD, it does not increase your adjusted gross income. (And that’s a good thing!) There’s more about RMD, below.
Year-end Tax Tip on Gifts
In 2019, be aware that you can give personal gifts up to $15,000 a year per recipient. At that level, you will not suffer tax consequences for your generosity. DiBenedetto said: “This equates to $30,000 per year for a married couple. The lifetime exclusion amount for gifts is $11,400,000 for 2019.”
Additional Note on Being over 70 and the RMD (Required Minimum Distribution) Rules
So, let’s say your parents have been saving in a tax-qualified retirement account. After they reach the golden years of 70 and a half years of age, the government requires them to withdraw at least a minimum amount each year from their retirement accounts. You might ask why. The reason is that these tax saving plans are tax-deferred investment earnings. Thus, the Required Minimum Distribution (RMD) rules ensure these tax-sheltered savings ultimately become taxable.
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- The Gavrilov Tax Squad wants you to know these rules apply to several types of accounts: employer-sponsored plans, like 401(k) and 403(b) plans,
- traditional IRAs (including those holding SEP plan contributions),
- and SIMPLE IRAs.
- And last but not least, Roth IRAs are not subject to the RMD rules while the IRA owner is alive.
However, please refer back to the beginning of this blog article to review our tips on the Roth IRA. We must also note that beneficiaries are required to take those same RMD distributions after the IRA owner’s death.
Year-end Tax Planning Final Tip for 2019
But remember, all of these year-end tax planning tips begin with a preliminary assessment of your tax bracket (adjusted income). Then check over the full slate of tax brackets, as stated at this convenient online resource by the U.S. government. This table shows the tax brackets for individual and joint taxpayers as well as surviving spouses. There you will see adjusted income groupings. And to the right, see the tax you will owe. You may notice, the amount you owe is a formula.
Below is a limited sample from the tax table for each filing category.
2019 Individual Tax Brackets and Tax Dollars You Owe:
- If taxable income is 0 – $9700, then your tax is 10% of that amount.
- If taxable income is $9701 to $39,475, Then you will owe 10% of that amount plus 12% of the amount over $9700. As an example, you had a taxable income of $10,000. 10% of that amount is $1000. That means you made $300 more than the base ($9701). So, 12% of that $300 is added. This extra $36 is added to the $1000, making your total tax bill $1036.
As your income increases to the next bracket and beyond, so does the amount of tax you owe. Notice also that the tax overage rate amount also increases.
2019 Married, Filing Jointly and Surviving Spouses Tax Brackets and Tax Dollars You Owe:
Are you are married and filing jointly or a surviving spouse, the tax table covers both.
- If taxable income is 0 – $19,050, then your tax is 10% of your adjusted income.
- If taxable income is $19051 to $77400, your tax is $1905 plus 12% of the amount over $19,050.
For a complete listing of bracket categories and tax due, go to this government site.
So, as you see, just as we stated at the beginning of this blog Year-end tax planning tips, everything begins with knowing your tax bracket. And Gavrilov & Co is here to help.