In all the holiday prep and shopping haste, you may have forgotten that New Year’s Eve not only marks the end of the decade but the end of the tax year.
And while shopping, feasting and toasting champagne may be how you want to spend the remainder of the year, it can pay off big time come April to review your finances now and make a few last-minute changes that could trim your taxable income.
Money rounded up five of the biggest tax-saving strategies you can still do, but you’ll need to act fast with only 11 days left until the cut off point.
1. Protect Your Stock Market Gains
The stock market heated up this year, with the Dow Jones Industrial Average currently up more than 20% since December 2018. If you sold stocks at a profit, the government could tax you as much as 23.8% (more if you've held them for less than a year) of the difference between the price you paid and what you sold them for. Even if you’ve not personally sold any stock, you could face the same IRS bill thanks to long-term capital gain dividend distributions if you own mutual funds outside of tax-advantaged retirement accounts.
But you can offset some or all of the tax burden from your stock makret gains by selling off any losing investments within your portfolio, says Dave Du Val, TaxAudit's chief customer advocacy officer. That’s because getting rid of shares that are worth less now than when you bought them results in capital losses, which are deducted from your capital gains to determine the actual amount you’ll owe the IRS.
2. Bunch Charitable Contributions
Donors who were used to seeing their acts of charity pay off on their tax bills faced some surprises last year thanks to the Tax Cuts and Jobs Act. The law drastically raised the standard deduction, or the amount of each taxpayer's income not subject to federal income tax, making it less advantageous for people to itemize deductions — including for charitable gifts.
With the standard deduction set at $12,200 for single filers and $24,400 for married joint filers in 2019, the hurdle to see any tax savings from your donations mounts higher, which is why CPA and financial planner Michael Landsberg recommends grouping your charitable contributions into alternate years. Doing so could help you exceed that standard deduction amount every other year resulting in bigger tax savings.
For instance, if you usually give $8,000 a year to your favorite nonprofit, you won’t surpass the standard deduction hurdle in any one year and receive any extra tax benefits from your generosity. But if you already gave $8,000 at the start of 2019 and were planning to give another $8,000 early next year, consider moving the donation up. If you make it by Dec. 31, your combined $16,000 would eclipse the new, higher standard deduction for single-filers,
Alternatively, if you prefer to keep your nonprofit donations evenly spaced out, you could still bunch your donations by contributing that larger sum biannually to a donor advised fund, says Landsberg. These giving accounts administered at public charities, typically operated by financial firms like Vanguard or Fidelity, allow donors to make charitable contributions and receive immediate tax benefits for doing so while doling out grants from the fund at a later date.
3. Donate Your Required Minimum Distribution
Taxpayers age 70½ or older who must make annual withdrawals from certain retirement accounts, such as an IRA or 401(k), can give a portion or all of that money to a qualified charity without having to pay income tax on the amount donated up to $100,000.
To make a qualified charitable distribution, it’s crucial that you instruct the account administrator to give the amount directly to the charity, says Landsberg. If you take possession of the money first and then donate it, you will owe income tax on the sum, and your gift will be treated as any other, meaning you’ll need to itemize to see any tax benefits.
This can be a big cost saver for older individuals worried that taking their annual required minimum distribution will push their income into a higher tax bracket or lead to higher Medicare Part B premiums.
Even if you don’t want to donate your required minimum distribution, make sure you’ve taken out the correct sum from all necessary accounts before Dec. 31 or you could face a 50% tax penalty on the shortfall, adds Du Val.
4. Boost your retirement savings
You can save up to $19,000 in a 401(k) plan this year or, if you’re age 50 or older, $25,000. If you haven’t hit that threshold yet, and you can afford it, consider amping up your savings drastically with your final paycheck of the year to reduce your taxable income.
Instead of directing say 6% of your pay to your 401(k) as you might have done all year, ask HR if you can channel upwards of 50% or more of your final paycheck. Some employers may not allow you to put the whole amount into a 401(k), but many will allow you to go up as high as 80% or 90%, says Landsberg.
It can also be a smart move if you’ve been saving less than the necessary amount to receive a full company match as then you not only reduce your tax bill but capture more of those free employer contribution dollars.
5. Consider a Roth IRA Conversion
If you’ve had a low income year, maybe because of a job loss or retirement or taking time out to care for a child or ill loved one, it might be worth considering switching some of your retirement savings from a traditional IRA to a Roth IRA, says Landsberg.
Because you are converting the money from a pre-tax account to an after-tax account, you will have to pay income taxes on the amount you are converting. But if you believe your current tax rate is lower than it will be when you need to begin making withdrawals from your account, the move can be a huge tax saver down the line as you’ll be enjoying tax-free Roth IRA withdrawals that don’t come with annual required minimum distributions when your income is perhaps at its highest.
Just be sure when making this move, says Landsberg, as there is a five-year hold placed on money that was part of a Roth conversion and the Tax Cuts and Jobs act ended taxpayers’ ability to re-characterize a conversion after the fact, or essentially undo it.