UPDATE: Your Year-End Tax Planning Checklist

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This article has been updated to reflect changes for 2019.

We have reached that magical time of year when holiday decorations come out of their box and the world becomes a bit more colorful thanks to the miracle of LED twinkle lights. It is a time for wistful reflection on happy memories with loved ones. And, of course, for tax planning.

Even with a bit less than two months remaining in 2019 and no big changes in tax law as there were last year, there are still relatively simple end-of-year tax planning tactics available to help lessen the burden in April 2020.

Verify Withholding and Correct Underpayments

Last year, the change in tax law and reduced withholding amounts caught many people off guard with higher out-of-pocket tax bills in April due to less withholding throughout the year. Even those who braved the somewhat less-than-user-friendly IRS withholding calculator often found themselves thwarted by a frustrating user experience.

The good news is that this year’s IRS withholding calculator has been redesigned and is significantly easier to navigate. Now is a good time to double-check your withholding and make any necessary adjustments.

Although increasing your final estimated payment will only correct a Q4 2018 underpayment, increasing withholding can correct underpayments retroactively because the IRS lumps all withholding payments together and treats them as though they were made in equal parts across all four quarters.

If you are working with a tax professional, they will likely have already done projections to ensure accurate estimated payments for investment and other income, but if you are doing your own taxes, now is a good time to visit the IRS withholding calculator and see what, if anything, needs to be done.

Max Out Your 401(k)

The maximum tax-deferred contribution to a 401(k) retirement plan has once again increased by $500, reaching $19,000 for individuals under age 50 in 2019. Individuals who are 50 or older by the end of the calendar year can make additional “catch-up” contributions of up to $6,000, for a total of $25,000 in 401(k) contributions in 2019. If you have celebrated, or will celebrate, your 50th birthday in 2019 and haven’t taken advantage of the catch-up contributions, there’s still time to do so before year-end.

Evaluate Charitable Contributions

The maximum allowable cash charitable contribution remains at 60 percent of adjusted gross income (AGI) for 2019, providing some additional headroom for individuals looking to reduce their 2019 tax burden through charitable gifting. Charitable contributions of long-term appreciated stock or property remain limited to 30 percent of AGI.

Even if you don’t have a charity in mind, contributions to a donor-advised fund (DAF) will allow you to take advantage of the tax deduction now and decide on a specific charity later.

Harvest Losses

At first, this recommendation seems counterintuitive—after all, the Dow is up more than 18 percent year-to-date. Despite the overall increase, however, 2019 has been a year of significant volatility in the markets, and chances are that at least some portion of your portfolio is ripe for harvesting losses.

Losses from the sale of depreciated stock will reduce your 2019 taxable income while the purchase of stock with similar market exposure, or later repurchase of the same stock, will have minimal effects on long-term investment return. Your advisor team can help you decide which strategy, if either, is best for your specific investment goals.

Maximize HSA Contributions

If you are eligible to make contributions to a health savings account (HSA), remember that the IRS has increased the maximum allowed contributions to $3,500 for an individual or $7,000 for a family in 2019. Since money in an HSA account remains yours and contributions reduce taxable income, maximizing contributions is a smart tax planning move. Everyone eventually has medical expenses and using pre-tax money to pay for them is almost as good as getting a 20 percent (or more) discount.

Verify IRA Distributions

If you have reached the age of 70 ½, make sure that you have taken the annual required minimum distribution (RMD) from your IRAs to avoid penalties. Also, if you do not need to use the income from your RMDs for living expenses or investing, consider making the RMD a qualified charitable distribution (QCD). QCDs do not provide a deduction, but also do not count as income and therefore will not increase AGI, potentially avoiding phaseouts of other deductions.

Year-End Gifting

The annual gift tax exclusion amount remains unchanged at $15,000 in 2019, and married couples can double that to $30,000. These tax-free gifts can be a useful estate planning tool so if you are not already taking advantage of the annual gift tax exclusion to move assets out of a potentially taxable estate you should discuss such gifting with your estate planning team.

Final Words

Not every one of the above tips will be useful for every person, but anyone who is able to use more than a few of them may well be able to benefit from the more advanced personalized planning offered by tax and investment professionals.

This article was originally published on December 12, 2018.

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