Time is Running out to Lower Your Taxes for 2019
Year-End Moves that Can Help!
Part II of III Part Series
Think you are paying too much in taxes today? Do you realize that we are at the lowest tax rates we’ve had in 100 years! Yes, in 1917 the top tax rate was 67%; in 1918 it went to 77%. Too far back? Okay. How about 1936 – 1940 at 79% where it remained until 1942-1943 when it went to 88%?! Still not high enough? Okay. How about 1944-1945 at 94%? Throughout the 1960s, 1970s and until 1980, the highest rate capped out at 70%. It wasn’t until the early part of the 1980s that we saw rates drop to an upper level of 50% for the maximum tax rate. Along came the 1986 tax act and the top marginal rate dropped to 38.5%. Throughout the rest of the 1980s, 1990s and up until today, our maximum tax brackets have ranged from 35% – 39%. So what changed? The spread between the brackets and the levels of income that are taxed at some of the lower rates. For 2019, a married couple can have taxable income up to $321,449 and still be in the 24% tax bracket ($160,724 for a single taxpayer). Now that’s a sweet rate compared to history! Are you planning to maximize your opportunities?
- Feeling Charitable AND you are 70 ½ or older? You know where this is going….yes, your Required Minimum Distributions (RMDs). Do you need all of the money you are required to withdraw from your IRA each year? If not, taxpayers who are 70½ or older can transfer up to $100,000 from a traditional IRA tax-free to charity each year, as long as they transfer the money to the charity directly. No, you don’t have to do the entire $100,000. You can do any amount up to that, including your annual RMD.
The Qualified Charitable Distribution (QCD) will count as your RMD without being added to your adjusted gross income, which can be a real bonus if you were going to take the standard deduction instead of itemizing. (You can’t itemize charitable contributions that were contributed via a QCD). The transfer could also help keep your income below the threshold at which you’re subject to the Medicare high-income surcharge, as well as, hold down the percentage of your Social Security benefits subject to tax. WOW! This is a savings idea in so many ways if you were already making charitable contributions!
Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA, payable to the charity. Be sure to allow plenty of time to complete a QCD prior to year-end, because the money has to be out of the account and to the charity by December 31.
- Still Feeling charitable? Can those contributions really make a difference on your tax return this year? Maybe! Are you giving at roughly the same level each year but not really taking advantage of the tax savings – maybe because you are not itemizing? You have options. Consider either bunching your contributions or using a donor-advised fund.
With the “bunching” concept, you would actually contribute your current year amounts AND next year’s amounts all prior to the end of the current year. Then, next year, you would skip your contributions (since they were already done this year).
Another option is consider using a Donor Advised Fund. Putting your money or other assets, such as stocks or personal property, in a donor-advised fund allows you to deduct the entire contribution in the year you make it and decide later how you want to dole out the funds to the charities of your choice. Contributing one lump sum this year may help lift your deductions above the standard deduction amount and allow you to itemize. Obviously, in order to take advantage of either of these strategies, you have to have the cash on hand to do so, but applying these strategies can save you a bundle in taxes. You can couple the above by also cleaning out your unwanted household items. Yes, you could have a garage sale, but really, are you going to? Donating clothes, kitchenware or furniture you no longer need can also boost your deductions while helping a worthy cause. Your deduction is based upon the donated item’s “fair market value” (or what it might sell for at a thrift or consignment shop). I have provided a number of useful tools for your use on my WEBSITE.
You will need a written acknowledgment from the organization if you are claiming a contribution of $250 or more. We also recommend taking photos of the donated items for your records and as documentation to support your deduction. For donated items valued at more than $5,000 (very large donations, art, antiques), you will be required to have a written appraisal by a qualified professional.
- Are you taking full tax-advantage of your Retirement Savings Plan? MAX it out! As the year comes to a close, you may be able to squeeze a little more money from each paycheck for your retirement savings. Limits for 401(k) contributions are up to $19,000 and you can contribute another $6,000 in catch-up contributions if you’re 50 or older.
Unless you elect to contribute to a Roth IRA (which is NOT a bad idea either), pretax contributions will lower your take-home pay and reduce your tax bill. If your employer offers a Roth 401(k), you can make contributions that won’t lower your taxable income now but withdrawals will be tax-free in retirement. If your employer offers both types of plans, you can direct new contributions to the Roth 401(k) rather than the pretax 401(k) at any time during the year.
Don’t have a 401(k) plan at work? No problem, consider contributing to an IRA for you and your spouse. The contribution limits for 2019 are $6,000 each. If you are age 50+, then you can contribute an additional $1,000. Doing so for each of you can add up to some tax savings.
Don’t like the State of Taxes? If you are living in a high income tax state, you could move. It may seem like a sarcastic comment; however, there can be significant differences in the levels of state income tax from one state to another. States like California, Hawaii, Oregon, Minnesota, New Jersey and the Washington DC have some of the highest rates of tax in in the nation, while other States such as Alaska, Florida, Nevada, South Dakota and Texas (there are seven in all), have no state income tax.
The other thing you can do is PLAN! Get help from a qualified tax professional. Although using off the shelf software can be inexpensive, it can’t help you think through and analyze your personal situation like a qualified tax planner can. If you are a business owner, have had changes to your family dynamics during the year, experienced a significant fluctuation in your income, are planning for or in retirement or earned money from several different sources, hiring a qualified and experienced tax planner may be worth the cost to ensure that you are NOT overpaying your taxes!
At Lynco Financial & Tax Services, Inc., we rescue our clients from paying thousands of dollars in unnecessary taxes every year. Lynn is proud to have earned the special designations of Certified Tax Planner & Certified Tax Coach, which means she is an expert in tax planning strategies and has the ability to identify tax credits, deductions, and loopholes that the average CPA, accountant, or tax preparer does not know how to find or is simply too busy to even look for.
Our goal at Lynco Financial & Tax Services, Inc. is to help YOU, Your Family and Business Owners – KEEP more of what you make and SAVE more of what you keep! We help people just like YOU make smart choices about your money and finances so you can pursue YOUR goals, CUT YOUR TAXES and spend more time on what is important to YOU.
Call our office today at 863-295-9895 if you would like to STOP overpaying your taxes and for more information on how we can help you!
Lynn A. Schmidt, EA, CTC, CTP, CFS, CSA, ARA
Enrolled Agent, Certified Tax Planner & Certified Tax Coach
Tax & Financial Strategist