Yes, it’s still a few months before you have to strap on the gloves and step into the ring with the IRS again, but you still have some time to create the maximum amount of legal deductions and reduce the tax bite. Here are some to consider:
Adjust your W-4 withholding
If you think you’ll owe taxes when you file for 2019, have more money withheld from your check for the rest of the year. A little bit of paperwork with the HR department and a little less in your pocket now can make things a little easier come April 15 next year.
Adjust your retirement contributions
If you haven’t maxed out those retirement dollars, that’s another option to keep the government’s hand from going deeper into your pocket.
In 2019, you can contribute up to $19,000 to your 401k. If you’re 50 or older you can make an additional catch-up contribution of $6,000 for a total of $25,000—all pre-tax.
If you’re self-employed you can contribute to a Simplified Employee Pension (SEP) up to 25% of your net earnings up to a total of $56,000 for 2019 and your contributions can be deducted as a business expense.
You can make tax-deductible contributions of $6,000 to an IRA; $7,000 if you are 50 or older.
There’s a little-known tax credit called the Savers Credit that rewards lower-to-middle income taxpayers for contributing to their retirement. Taxpayers who qualify receive a tax credit of $1000, or $2000 for married couples filing jointly. It is a tax credit, therefore it reduces your taxes dollar-for-dollar.
Clean out and give away
Hey, there’s gold in them thar’ closets. Go through your clothes. Go through your attic. Get rid of stuff you don’t need, don’t wear, don’t use, or doesn’t have sentimental value. You’re better off getting a tax deduction for stuff that’s just taking up space in your house, your garage, or your storage unit.
Other charitable gifts
There may be more options for giving to charity than you’ve thought about. The first thing that usually comes to mind is giving cash, stocks, bonds, and mutual funds—liquid assets the charity can quickly turn into cash.
You can also give complex assets—illiquid assets—such as real estate, restricted stock, insurance interests, private company stock in both S and C corporations, private equity interests in LLCs and limited partnerships, oil and gas interests, agricultural commodities like grain, some alternative investments, even Bitcoin and other cryptocurrencies.
Giving complex assets is a little longer process because the gift has to be appraised. The appraisal can be done 60 days prior to the date of the gift but no later than when the donor files their tax return. So, if you’re going to give complex assets this year you’ll have to get started quickly.
Another charitable giving option is life insurance. Purchase a life insurance policy and name the charity as owner and beneficiary. You can fund the policy with a lump sum or pay premiums. Both are tax-deductible at the time of the gift.
You can also gift an existing policy. For example, you may be considering whether to cancel a policy you purchased for a need that doesn’t exist anymore. Transfer the policy to the charity, making it the owner and the beneficiary. You’ll get a current tax deduction for the policy’s fair market value.
If you know your income will be more this year than in some future years you may want to consider contributing now the amount you plan to give over the next 5-10 years.
If you take advantage of such a donation, you can make the donation to a Donor Advised Fund which gives you the flexibility of deciding later what charity(s) you want the money to go to.
Instead of gifting directly to charities, you establish an account at a sponsor organization. You make an irrevocable contribution to that account and receive a tax deduction that year. Then when you’re ready to grant money to a charity you tell the sponsor who to give it to and how much. The sponsor organization does all the due diligence and all the record-keeping.
IRA Charitable Rollover
If you are older than 70 ½ and have to take Required Minimum Distributions from your IRA, which is taxed as ordinary income, you can make a Qualified Charitable Distribution of up to 100 thousand dollars to organizations that meet IRS rules as a charity. If you’re married, your spouse can give up to 100 thousand dollars as well.
To qualify, your IRA custodian or trustee must send the donation directly from your IRA to the charitable recipient. The gift is not included in gross income and therefore becomes a non-taxable distribution. However, since it’s not included as income, the IRS doesn’t allow you to claim the gift as a charitable deduction.
Go back to school
If you have moderate income, you may be eligible for the Lifetime Learning Credit. You can claim a tax credit of 20% of your tuition expenses, up to $2000 per tax return. You don’t need to be on track for a degree. The cost of any class that you take at the college level is eligible for the tax credit.
Pay your property taxes early
If you have to pay property taxes in January, pay them in December. Do that and you pick up another tax deduction for this year.
Tax Loss Harvesting
What losses are in your investment portfolio? It may be to your advantage to take them and offset capital gains you realized earlier in the year. When you’ve reviewed an investment that’s worth less than you paid for it ask yourself if you’d buy the same investment today. If not, sell it. Don’t hang on to it hoping it will, someday, be back to where you bought it.
But if you have losses in investments you really like, but could use the loss, keep in mind the Wash Sale Rule from IRS Code section 1092. It allows you to sell at a loss, deduct the loss, and buy back the same investment or one similar in 31 days or more without tax penalty. Buy it back in LESS than 31 days and the deduction is not allowed.
Health Savings Accounts
If you’re eligible for a health savings account and haven’t made your full contribution this year, it’s not too late. For 2019, if you have self-only high-deductible health coverage, you can contribute up to $3,500. If you have family high-deductible coverage, you can contribute up to $7,000. In addition, participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution.