Make These Moves Now to Reduce Your 2019 Taxes

Did you owe tax last year after the federal tax law changes? I did. Last year the IRS changed withholding guidance for employers that may have put more money into our checks but left us with a larger payment at tax time. Now is the time to check whether you’ll owe or get a refund and how to adjust if you need to.

Test where you stand: The IRS has a very handy Tax Withholding Estimator that helps you determine whether you’ll owe or might get a refund. They have instructions on what you’ll need to fill it out and it’s relatively simple - https://apps.irs.gov/app/tax-withholding-estimator.

If you believe you’ll owe, here are some tips to reduce or eliminate that amount.

Max out your retirement account contributions:

The best way to lower your tax liability is to increase your pre-tax contributions to your 403(b) or 401(k) so you get to keep your money rather than send it to Uncle Sam. Every dollar contributed will decrease your taxable income by a dollar.

• The maximum allowed for 2019 for 401(k)s or 403(b)s is:
  • $19,000 for those under 50 – this does not include your employer’s contributions;
  • $19,000 plus $6,000 for those 50 and over;
  • UK faculty and staff can also contribute those same amounts to a 457(b) plan – a great tool to save 2 years for every 1 worked;
• For IRAs, those under 50 can contribute $6000 and those 50 and over may contribute $7000 – those contributions can also reduce your tax liability;
• As the rules are complicated for who qualifies to make tax deductible contributions to IRAs, consult a tax professional or your financial advisor to see if you qualify;
• If your income is too high to make a tax-deductible contribution to an IRA, consider contributing to a Roth IRA instead. While you won’t receive a current year tax deduction, your contribution will grow tax-free so when you take a withdrawal after the age of 59 ½, you will pay no income tax or capital gains tax. There are income limits here too so, again, ask a professional first.

Charitable contributions:

• Unless your deduction for state and local taxes plus home mortgage interest and charitable donations exceeds a total of $24,000 for married couples or $12,000 for singles, you likely won’t receive a tax deduction for gifts to your favorite charities;
• Tip: If your itemized deductions are close to that new standard deduction threshold, consider making some charitable contributions this year that you might otherwise make in 2020. This will help you get the most tax benefit from contributions you plan to make anyway;
• You may also gift appreciated stock or mutual funds from your taxable accounts directly to a charitable organization. You may or may not receive a current-year deduction, but you will avoid paying any capital gains taxes;
• And, if you are over 70 ½ and taking Required Minimum Distributions, which are taxable, consider making a Qualified Charitable Distribution. In other words, gift part or all of your RMD to a charity and avoid paying income tax on that amount.

Tax Loss Harvesting:

This is a fancy way of saying you can sell any investment in a taxable account that is worth less now than what you paid for it, and use that loss to offset gains realized when you sold a winner. And, as a total, if your losses are more than your gains, you can use up to $3,000 of excess loss each year to reduce other income.

There aren’t too many people who find taxes interesting, or even tolerable, to think about. But a few minutes now may help reduce your tax liability for 2019. Tax preparers can be a resource, but most are better at looking backwards than forwards, so check with your financial advisor first as we like to look to the future.

Steve Byars, CFP