It's no secret that the last quarter of any year is a busy one for those who wants to get a jump on tax planning and preparation. With holidays and shopping competing for your attention it’s easy to lose your focus on long-range financial planning. I understand completely. However, it's smart to look at ways you might minimize your tax liability.
The end of the year is one of the best times to review your finances, prepare your tax documents, and make any changes to your financial strategy. Year-end evaluation and planning with an experienced advisor can help you take full advantage of tax reform. Planning and preparation can reduce your individual tax bill for 2019 and avoid surprises heading into 2020. I recommend these six questions:
1. Is itemizing still right for you?
The TCJA increased the standard deduction to $24,400 for married couples filing jointly, $12,200 for single filers in 2019. It also places new limits on itemized deductions, including a $10,000 cap on property and state and local income tax deductions. Using the standard deduction instead of itemizing may make tax preparation simpler, but work closely with your tax specialist to make sure it’s the right choice.
2. Can you max out on your retirement plan?
Consider increasing your contributions to your 401(k), IRA or other retirement plan to reach the maximum contribution amount. By increasing your retirement savings, you will also potentially lower your taxable income. If you are 50 or older, you are eligible for "catch up" contributions. You generally have until December 31, 2019, to contribute to a 401(k) plan and until April 15, 2020, to contribute to an IRA for the 2019 tax year.
3. Should you convert your traditional IRA to a Roth IRA?
Depending upon your particular situation, it could be beneficial to convert from a traditional IRA to a Roth IRA. To do so you would pay taxes now, rather than holding the funds in the traditional IRA and paying taxes upon distribution at a later date. Consult with your tax advisor to see which might suit your circumstances better.
4. Will your stock losses offset capital gains?
Now may be a good time to consider selling certain underperforming investments in order to generate a capital loss before the end of the year. Taxpayers can deduct up to $3,000 ($1,500 for married filing separately) of their excess losses, which reduces overall income. Consult with your tax advisor.
5. Are your investment strategies tax-aware?
Ask your tax advisor about putting a portion of your income into investments such as tax-free municipal bonds that are not generally subject to federal income taxes. This is a longer term strategies which probably won’t affect your tax picture this year. However, when they start generating income they could potentially ease your tax burden.
6. Are you taking advantage of ways to cut health care costs?
Health savings accounts (HSAs) and flexible spending accounts (FSAs) are tax advantage accounts that allow you to sock away pretax contributions for qualified medical expenses that your insurance doesn’t cover. Both HSAs and FSAs allow people with health insurance to set aside pre-tax money for health care costs referred to as “qualified expenses,” including deductibles, copayments and coinsurance, and monthly prescription costs. But there are key differences to these accounts. Since it literally pays to get this decision right, consult your financial advisor for advice before you make the decision.
Your CPA has the knowledge of your personal finances and the expertise to combine personalized planning with annual tax preparation and filing. It's smart to work with your tax advisor to update your tax planning as part of your long-term financial plan.
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Charles P Myrick CPA offers tax preparation services for individuals using a process that combines smart, personalized planning with annual tax preparation and filing. Our job is to help you know about all the available tax opportunities that meet your individual needs and circumstances. We work closely with tax lawyers, and investment advisors to ensure that all the details are legally sound, technically accurate, and working to your maximum benefit. Contact us to learn more: (202) 789-8898