Time is Running out to Lower Your Taxes for 2019
Year-End Tax Moves that can Help!
Part I 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 – ok, how about 1936 – 1940 at 79%; until 1942-1943 when it went to 88%! Still not high enough – ok – 1944-1945 = 94%. Throughout the 1960’s, 1970’s and until 1980 the highest rate capped out at 70%. It wasn’t until the early part of the 1980’s 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 1980’s, 1990’s and up until today, our maximum tax brackets have ranged from 35% – 39%. So what has 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?
- Do you own a business? Have you reviewed all of your deductions for 2019? Don’t be afraid of being audited. The tax code allows for a variety of business deductions and you are cheating yourself (and overpaying your taxes) if you are not taking advantage of all the U.S. Tax Code has to offer. If you are legitimately entitled to a deduction, you should claim it. Just be prepared to document your deductions. According to US Court of Appeals, Judge Learned Hand, who said on July 14, 2009, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
Are you sure you are deducting all of the expenses you are entitled to? Are there expenses you can “pre-pay” for 2020 and still get the deduction this year? How about contributing to a retirement plan for your business? There are time limits to establish various plans throughout the year and you do have choices as to which plan may work best for you, however, as the clock ticks away, those choices become limited. You should speak to your trusted tax and financial advisor soon to be sure you are taking advantage of every opportunity that is offered to you…legally! Why waste those tax deductions?
- Do you have Health Insurance? Unless you have very high medical expenses, it’s not likely that you will be able to deduct those medical expenses – unless – you own a business and everything is structured properly. It’s true, the health care mandate (aka the Obamacare Penalty) has been removed for 2019. You will no longer be penalized on your federal tax return for NOT having health insurance. However, some states (Massachusetts, Washington-DC and New Jersey and Rhode Island in 2020) still have penalties for not having health care coverage. Yes, health care coverage is expensive – but NOT having it is even more costly. Since it is open enrollment season, maybe now is a good time to consider having the proper health care coverage.
Health Savings Account (HSA) – Need to make that coverage a bit more affordable and put those dollars to work for you and your family? Consider a high deductible health care plan AND couple it with a Health Savings Account. But be careful, just because YOU think the deductible is high doesn’t mean the coverage qualifies to be considered for an HSA. Work with a trusted health insurance agent.
If you have self-only coverage, you could be eligible to invest in an HSA if you have a deducible of at least $1,350. If you have family coverage, you may be eligible if your deductible is at least $2,700. Coupled with the right plan, you would be eligible to invest up to $3,500 for individual policies or $7,000 if you have family coverage. If you are age 55+, you can bump those contribution limits with an extra $1,000. These contributions are deductible on your tax return – without having to itemize!
Yes, HSA contributions can reduce your taxable income and accumulate as another means of retirement savings for you. You withdraw funds tax-free to cover healthcare costs, so you get a huge tax benefit since both deposits and withdrawals are tax free. However, by utilizing and applying some strategic planning, if you don’t use the funds for healthcare costs now, you can allow those contributions to accumulate and have the option of using them in later life to reimburse you for out-of-pocket heath care expenses, or (if you are simply blessed and super healthy) take withdrawals after age 65 and be taxed on the distributions as ordinary income without paying any penalties. Let’s face it, if you live long enough, you are going to have health care expenses. In fact, it will probably be one of your largest expenses in retirement besides taxes. Why not plan for it now!
- Roth IRA Conversions…WHY? See my opening paragraph on tax rates and take advantage of our lower tax rates now! As taxpayer’s, we are experiencing some of the lowest tax rates in history. Do you think rates are going up? Well, according to the rules set forth under the Tax Cuts and Jobs Act, the current tax rates are in effect from January 1, 2018 through December 31, 2025 – then all bets are off and the tax rates revert back to their former higher levels. That’s a tax increase built right into the current tax laws!
This is the reason why you should consider converting some money from a traditional IRA to a Roth IRA this year; up to the top end of your income tax bracket. You’ll pay taxes on the conversion (minus any portion that represents nondeductible IRA contributions), but the money will grow tax-free in the Roth after that. Converting your entire traditional IRA balance can bump you up to a higher tax bracket so that is why you want to establish a plan to spread conversions out over several years. Additionally, it’s wise to pay the additional taxes from your existing savings and not out of the converted IRA funds. Doing so will preserve more of your account working for you throughout your retirement years.
Be careful about making a large conversion if you’re within two years of signing up for Medicare—you’ll have to pay extra for Medicare Part B if your adjusted gross income (plus tax-exempt interest income) is more than $85,000 if you’re single or $170,000 if you’re married filing jointly. It’s a two year look-back process to determine your Medicare premiums, so a 2019 conversion could affect your 2021 premiums.
Don’t like the State of Taxes? Well, 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 designation(s) 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.
Our goal at Lynco Financial & Tax Services 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