It’s Time for Year-End Tax Planning
With year-end approaching, now is a good time to review income tax reduction strategies. Almost two years since the 2017 Tax Cuts and Jobs Act (“2017 tax act”) was enacted, it’s important to review some traditional tax planning strategies, as well as to determine whether new techniques could help cut your federal and state tax bills.
Determine Your Tax Bracket
One of the first steps to take is to estimate your 2019 tax bracket. This year’s top bracket is 37 percent for married couples filing jointly with adjusted gross incomes more than $612,350. The other rates for joint filers are 35 percent for incomes over $408,200; 32 percent for incomes over $321,450; 24 percent for incomes over $168,400; 22 percent for incomes over $78,950; 12 percent for incomes over $19,400; and 10 percent for incomes of $19,400 or less. (For single filers, tax brackets are generally half those for married filers; brackets for head of household filers are somewhat lower than single filers.) If you expect to be in the same or lower tax bracket next year, it may be beneficial to defer taxable income until 2020 to reduce this year’s taxable income. However, one of the key changes made by the 2017 tax act, the large increase in the standard deduction discussed below, must be factored into any year-end calculations.
Action Item: Shift some of your tax burden to a future year. Tried and true strategies for lowering your tax bill include deferring receipt of a bonus payment to 2020; accelerating remaining deductions into this year by prepaying a deductible expense; maximizing contributions to qualified retirement plans; or making larger charitable gifts. Put those saved tax dollars in your pocket rather than the government’s.
Itemize or Standard Deduction?
One of the most significant changes in the 2017 tax act was the dramatic increase in the standard deduction. For 2019, married couples filing jointly can claim a standard deduction of $24,400 ($27,000 if both spouses are over age 65).
If you claimed itemized deductions in the past, you may now want to consider “bunching” those deductions into one year in order to exceed the standard deduction amount; claim the standard deduction in other years when you’d have fewer itemized deductions. The easiest itemized deduction to bunch is that for charitable contributions. One way to accomplish this is to combine tax-deductible contributions that would otherwise be given in two or more years into one.
Action Item: Make charitable contributions in the “bunching” year to a new or existing donor advised fund (“DAF”) with the Jewish Community Foundation. Claim the charitable deduction in the year you make the contributions and spread distributions to charities over the next several years. The 2017 tax act also increased the annual cap on cash contributions to charity from 50 percent of adjusted gross income to 60 percent, which can make “bunching” even more attractive.
Are you older than 70½?
If you are at least 70½ years old and are considering donating to charity, it may be more beneficial to make the donation from an individual retirement account. Many people use the IRA Charitable Rollover to transfer up to $100,000 each year directly from their IRAs to public charities. Qualified charitable distributions can count against your “required minimum distribution,” but they are not taxed, because they are not reported as income. An IRA Charitable Rollover is not deductible, but because it is not included in income, the net effect may be the same as it would have been had you made a direct charitable contribution. As a bonus, you do not have to itemize to get the tax benefit of your gift, so you can still claim the higher standard deduction under the 2017 tax act.
Action Item: Use your IRA Charitable Rollover to establish an endowment fund, or to provide direct support to important charitable causes – including the Jewish Community Foundation.
2019 continues to be another good year for the stock market and other investment assets. As year-end approaches, it is a smart time to review your investment portfolio; consider timing the recognition of capital gains and losses for assets held long-term – more than one year- and short-term. The top income tax rate on long-term capital gains remains at 20 percent. (A 3.8 percent tax on net investment income also could apply.) Part of your capital asset review could include considering a gift of appreciated securities to charities. You can avoid paying any capital gains tax on the value of securities transferred to the Jewish Community Foundation, and you may be able to receive a charitable contribution deduction for the full fair market value of the securities at the time of the gift.
Action Item: Consider giving appreciated stock held for more than one year. It is fully deductible up to 30 percent of adjusted gross income and any excess can usually be carried forward and be deductible for up to five additional years.
Action Item: Donate appreciated stock to a donor advised fund or an endowment fund at the Jewish Community Foundation. It is an excellent way to maximize tax savings and retain the privilege of making grant recommendations in the future.
The Jewish Community Foundation remains available to work with you and your professional advisors to maximize the benefits of these and other tax planning strategies. For more information, contact us at 480.699.1717.
This is for informational purposes only and should not be construed as legal, tax or financial advice. When considering gift planning strategies, you should always consult with your own legal and tax advisors.