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It’s Not Too Late! These Year-End Tax Moves Will Save You The Most

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Rachel Sheedy, Year End Tax Moves

With Rachel Sheedy, editor for Kiplinger’s Retirement Report

Steve had a conversation with Rachel Sheedy, editor for Kiplinger’s Retirement Report, to get some great ideas on how to save on your 2019 taxes by making some important moves before the end of the year. Rachel recently published an article on the subject, “End-of-Year Moves to Trim Your 2019 Tax Tab”. Among the ideas she covered were taking advantage of the qualified charitable distribution and possibly deferring some deductions for another tax year.

Look At Your 2018 Deductions

Rachel opened things by saying that one easy first step is looking at the deductions you took last year. “You can refer back to your tax return for 2018 to get an idea of where you might look to save some money for 2019. They’re not that many changes (for 2019), which makes it a little easier to look for tax-saving moves.”

Steve noted the importance of making sure you include all your income streams when adding up your income. “Now, people may laugh when I say all your taxable income streams – they go, ‘Well, I got one, I got two’ – but some people do have more.” Rachel agreed, adding that retirees, in particular, may have more income streams than they realize, such as Social Security, a pension, and required minimum distributions from retirement accounts.

The Qualified Charitable Distribution

One potentially significant deduction can be accessed by those over the age of 70 and a half who are now taking distributions from their retirement accounts. Rachel explained the details of this deduction. “You can directly transfer from your IRA to a qualified charity up to a hundred thousand dollars. And that money that you transfer to charity can count toward your required minimum distribution.” The good part is that money won’t be added to your adjusted gross income, and therefore, it can reduce your tax bill substantially.

That kind of deduction can be very important, given that it’s much harder than it used to be to amass a lot of deductions by itemizing. Of course, the good news is that’s primarily because the standard deductions are so much higher with the recent changes in the tax laws. Rachel ran them down for us: “The standard deduction is $12,200 for single taxpayers and $24,400 for taxpayers who are married and filing jointly. People who are 65 or older, they can add an extra amount to that standard deduction. So, for spouses, each spouse who’s 65 or older can add an extra $1,300, and singles who are 65 plus can add $1,650. And you can add a standard deduction if you’re blind as well.”

A Tip On Itemizing Deductions

Rachel also had a tip for taxpayers who might still be better off itemizing deductions, if not this year, then on next year’s taxes. “You may want to take the standard deduction this year but itemize next year. If you can accelerate or push off deductions, you might have enough to itemize them one year but may not have enough to do it for two years.”

How To Avoid Underpayment Penalties

Steve brought up one of the key recent changes in tax law—the increased penalties for underpaying in prepayments on your taxes, such as how much you have withheld from your paycheck. You want to make sure that you’ve prepaid enough before the end of the year.

Rachel offered some helpful advice by informing listeners that an easy way to handle this is by looking at your 2018 tax bill. “If you make sure that you’ve paid at least a 100% or, if you’re a high-income taxpayer, 110% of your 2018 tax bill, that will ensure that you don’t have to worry about underpayment penalties.” That works even if you received, for example, a big bonus at the end of this year that you didn’t receive last year.

Contributions To Retirement Accounts And HSAs

Steve turned the conversation directly to end-of-year moves you can make for tax savings, such as contributions to your 401k. He noted, “Every dollar is a direct deduction from your adjusted gross income and you’re saving directly the taxes based on your tax bracket.” Rachel provided the numbers: “Employer retirement account contributions have to be made by year-end, by December 31st. You can stash up to $19,000 into a 401k by the end of the year for 2019, and if you’re 50 and older, then you can put in extra money. For 401ks and employer plans, that’s $6,000 extra for 2019. That’s $25,000 total that you could put away pre-tax for 2019.”

She added that even if you can’t make any more pre-tax contributions to a retirement account, “You might consider doing a Roth IRA contribution, which will not help you right now, but will help you in the future.” Steve wholeheartedly agreed with her, saying, “Roths are wonderful. If you don’t need the tax deduction now, but you want to have your money grow tax-free and not have to pay taxes when you withdraw it, they’re a wonderful vehicle.” He also provided a key piece of financial advice about the timing of contributions. Steve said, “There’s another thing, too, and that is the time value of money. Make your IRA contributions at the beginning of the year so you have a full year of tax deferral, as opposed to making them at the end of the year. A lot of people say, well, I’ll just wait, I’ll make it last minute. But you’d be smarter if you can make it in January, let’s say, for 2020 than in December because if you wait till December, then you’ve missed a whole year of tax-deferred compounding.”

When Steve asked Rachel about Health Savings Accounts (HSAs) to which those who qualify can contribute up to $3,500 a year, he specifically inquired about whether retirees can make HSA contributions. Rachel replied that once you’re on Medicare, you can no longer contribute to an HSA. She added that even pre-retirement people can now only qualify to take deductions for contributions to an HSA account if they have a high-deductible health insurance policy, regardless of whether it’s private insurance or employer-provided. Steve stressed the value of HSA accounts, stating, “It’s the one vehicle where you get two tax benefits because you’re getting the tax deduction when you fund the HSA, and then when you spend the money, as long as you use it for appropriate medical purposes, you don’t have to pay taxes on your withdrawals.”

Taking Investment Losses

Steve and Rachel wrapped up their tax conversation by talking about reducing your tax bill by harvesting unrealized investment losses you may have in your portfolio. Steve got the ball rolling on the subject with the observation that, “It’s inevitable if you have a diversified portfolio that you’re going to have some losses, but a lot of people like to hang onto their losses and sell their gains, which is kind of the opposite of what you should be doing.” He added that even if someone wants to hang on to a losing investment because they think it might turn around, they can still liquidate it now to take the loss and reduce their tax bill and then just buy it back in 31 days. Rachel agreed and emphasized the importance of being careful to avoid the “wash sale” rule that prohibits you from taking the loss if you buy the asset back within 30 days of selling it.

For more end-of-year tax tips, read Rachel’s article at Kiplinger’s Retirement Report.

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

Read The Entire Transcript Here

Steve Pomeranz: I thought that since we are approaching year-end, it would be a very good time to take a look at tax moves that you can make right now to reduce your 2019 taxes. I mean, we’re here in December, and we’ve only got a couple of weeks left, so let’s see what you can learn right now in order to save you some taxes next year. I’ve asked Rachel Sheedy to join me. Rachel is an editor for Kiplinger’s Retirement Report, and she’s written some articles on this in particular. So we’re going to talk to her right now. Hey, welcome to the show, Rachel.

Rachel Sheedy: Thanks for having me. I appreciate it.

Steve Pomeranz: Sure. So, before the new year arrives, as I said, it’s time to take a look at some last-minute moves we can use to trim our taxes. First of all, between 2018 and 2019, are there a lot of changes or is it kind of business as usual?

Rachel Sheedy: They’re not that many changes, which is a good thing. It makes it a little easier to look for tax-saving moves. You can refer back to your tax return for 2018 to kind of get an idea of where you might look to save some money for 2019. So, yeah, it makes a little easier, but it’s pretty similar.

Steve Pomeranz: All right, well, that’s good. Everything changes so much these days that it’s kind of-

Rachel Sheedy: Well, it did in recent years. Yes. So, there’s definitely a lot to learn.

Steve Pomeranz: Everything’s going to kind of be the same as last year. It’s such a rare occurrence.

Rachel Sheedy: Exactly.

Steve Pomeranz: All right. So, your first tip is the easy stuff. Estimating your 2019 tax tab by adding up all your taxable income streams. Now people may laugh when I say all your taxable income streams, they go, well, I got one, I got two. But some people have more.

Rachel Sheedy: Some people do. Particularly retirees might have pension income, social security benefits, distributions from retirement accounts. Many retirees are surprised, actually, how much taxable income they end up with in retirement. So, you do want to make sure you grab all of them in your calculation.

Steve Pomeranz: Yeah. So once you have a good idea of all of the revenue, so to speak, if you think of yourself as a company, what revenue have I brought in? Now you have to kind of subtract and look at the tax breaks that you know you will use.

Rachel Sheedy: Exactly. Yeah. You want to total those up, sort of see where you stand on things that you know that you might want to make use of. People who are 70 and a half and older can take advantage of the qualified charitable distribution move.

Steve Pomeranz: Yes, I want to talk about that.

Rachel Sheedy: … to sort of mitigate tax on their RMD money. So, if you know you’re going to use that, you want to account for that first, and then sort of see where you stand and then start looking for other moves, see if you’ve got any other options to turn your tax [crosstalk 00:02:41].

Steve Pomeranz: You want to see whether you’re going to qualify for the standard deduction or are you going to use the standard deduction?

Rachel Sheedy: Yes, that is a key part of the calculation because the moves you make could be very different if you are taking the standard deduction or if you’re going to be itemizing. And you might also want to look over not just this year, but sort of consider this year, next year, maybe even three years down the line, because maybe you want to take the standard deduction this year, but itemize next year. You might want to push some deductions into one year or another.

Steve Pomeranz: I see. If you can, if you have the ability to delay deductions or accelerate them, you can make a decision as to what to do. Now, how much is, for a single taxpayer and for married filing jointly, what are the amounts of the deductions?

Rachel Sheedy: Well, for 2019 the standard deduction is $12,200 for single taxpayers and $24,400 for taxpayers who are married and filing jointly. Of course, for people who are 65 or older, they can add an extra amount to that standard deduction. So, for spouses, each spouse who’s 65 or older can add an extra $1,300 to that standard deduction amount, and singles who are 65 plus can add 1650. And there’s also, you can add a standard deduction if you’re blind as well. So, that amount, those standard deduction amounts that they doubled a couple of years ago, that they’re pretty high these days.

Steve Pomeranz: They are, yeah.

Rachel Sheedy: Yeah. So many people aren’t itemizing anymore or they’re on the cusp. So again, as we mentioned, if you accelerate or you push off deductions, you might have enough to itemize them one year but may not have enough to do it for two years. So you can sort of really play with your tax strategy.

Steve Pomeranz: Yeah. So the standard deduction for couples is 24,400, which is double the 12,200, and yet one spouse may not be making enough to qualify, but you’re getting the benefit of it because it’s filing jointly. So, the other person perhaps can have more stuff they can kind of use it for. So there’s some kind of advantage. Now you want to also avoid underpayment penalties. And this is important because you’re required to pay estimated taxes, most retired people do and most self-employed people do, of course. Tell us about what you need to do to avoid paying penalties.

Rachel Sheedy: Yeah. So, and this is something I think some people got a shock with for their 2018 returns because they didn’t have enough withheld and things were sort of a little crazy. And the IRS gave people for 2018 a break, and experts are telling me do not expect that same break for 2019. So you really do need to make sure that you are double-checking that you are paying enough in tax for 2019 before the year ends.

Steve Pomeranz: Now if your tab is less than a thousand you don’t really have to worry about it.

Rachel Sheedy: Exactly. So that’s a key number. And there’s another way you can sort of avoid it is if you make sure that you paid at least a 100% or if you’re a high-income taxpayer, 110% of your 2018 tax bill. That will ensure that you don’t have to worry about underpayment penalties. Or you can pay at least 90% of your 2019 tax tab. So you’ll need to make sure your projections are pretty accurate. And at this time of year, they will be more accurate than if you were looking at this in say March or April.

Steve Pomeranz: I have a question. Hang on. I have a question. So let’s say that you pay 100% of what you paid in 2018, but you got some kind of a big bonus or something in 2019, will that 100% cover you and help you avoid being penalized?

Rachel Sheedy: Yeah. If you paid at least 100% or 110% of your 2018 tax bill, you should be safe and you’ll avoid the underpayment penalty.

Steve Pomeranz: Okay. Good. Good.

Rachel Sheedy: Yeah. If you haven’t done that, then you need to pay some tax on that big lump sum that you’re getting.

Steve Pomeranz: Yeah, be careful. Yeah. So with the year-end so close, your tax estimate for 2019 should be fairly accurate. I mean, you should really know by this point all the money that’s coming in so you can be more precise, so less room for error. All right, so let’s talk about ways to trim this 2019 tax bill before the calendar flips to the next year. I’ll start you off. The first thing you can do is do your 401k, make sure that you do the full amount of your 401k. Take us through those machinations.

Rachel Sheedy: Yeah. So employer retirement accounts, those contributions have to be made by year-end, so by December 31st. So that’s 401Ks and that type of account. And you can stash up to $19,000 into a 401k by the end of the year for 2019, but if you’re 50 and older, if you turn 50 anytime this year, you can put in extra money. And for 401ks and employer plans, that’s $6,000 extra for 2019. So that’s 25,000 total that you could put away pre-taxed for 2019.

Steve Pomeranz: All right. So that’s important, every dollar is a direct deduction from your adjusted gross income, and you’re saving directly the taxes based on your tax bracket. There is really very little else people can do these days, right?

Rachel Sheedy: It is much harder. There are very limited options for trimming your tax tab. But you can, there’s IRAs if you qualify for deductible contributions. If you don’t qualify for deductible contributions, you can still do non-deductible or you might consider doing a Roth contribution, which will not help you right now, but it will help you in the future to save taxes

Steve Pomeranz: Yeah. Roth’s are wonderful. They’re a wonderful way if you don’t need the tax deduction now, but you want to have your money grow tax-free and in a future day not have to pay when you withdraw it, it’s a wonderful vehicle. The issue is that a lot of people with high incomes can never do a Roth IRA. So, but it is very valuable for those with moderate incomes, right?

Rachel Sheedy: Well, yeah, they can’t do Roth contributions, but anybody with any income amounts can do Roth conversion. So, if you don’t qualify for the contribution, and again this is a tax contributing move for the future, not for today, because with Roth conversions, you do have to pay tax on the amount you convert.

Steve Pomeranz: Right. Nothing is free.

Rachel Sheedy: But, the benefit’s really in the future and purely for retirees who might be subject to Medicare premium surcharges or tax on their social security benefits. Having that stash of tax-free income can be really a key.

Steve Pomeranz: Can be very key. Yeah. There’s another thing too, and that is the time value of money. Make your IRA contributions at the beginning of the year so you have a full year of tax deferral, as opposed to making them at the end of the year. Because a lot of people say, well, I’ll just wait, I’ll make it last minute. But you’d be smarter if you can make it in January, let’s say, for 2020 than December because you’ve missed a whole year of tax-deferred compounding.

Rachel Sheedy: Yeah, that’s true. And I think some people put it off because IRAs, you can save money on your 2019 tax tab, I mean if you can make deductible contributions, but you actually can put away that money as late as the mid-April tax-filing deadline. So, I think some people do wait late because of that delayed deadline. But you’re correct, that if you can put it in at the beginning of the year, you’d get that whole year of tax deferral.

Steve Pomeranz: Yeah, it makes a big difference. And all you’re doing is you’re just taking money from one account if—obviously if you’ve taken savings—and you’re just moving it over to another account. So it’s just a simple conversion or a transaction to move money from one to another, but you’re getting significant benefits by doing that. Let’s talk about health savings accounts very quickly. You can contribute up to $3,500. What if, okay, so everybody kind of knows that if you work for an employer that has a health-savings plan, you can make this up to $3,500 contribution. What if you’re retired? Can you have an HSA?

Rachel Sheedy: Well, you have to have a high-deductible health plan, whether it’s through an employer or private insurance. Once you’re on Medicare, you can no longer contribute to an HSA. There’s some legislation in Congress that they’re trying to change that, but who knows when that will happen. So once you’re on Medicare, you need to not contribute anymore. But you can still use the money that’s within the account. So if you’re retired and you’re pre-65, you might have an opportunity to still save in a health-savings account if you choose a high-deductible health plan. And it’s great if you have the opportunity to build up that account. Again, you’ll save money on taxes now if you contribute to that health savings account, but you can also save money on taxes on the future with that stash. It is definitely something to look at as an opportunity.

Steve Pomeranz: Yeah, it’s the one vehicle where you kind of do get the benefit of both because you’re getting the deduction when you fund the HSA, and when you spend the money if you use it for the appropriate medical purposes, you don’t have to pay taxes on it. So it’s really a very attractive thing that you can do. I want to switch gears here because, for those who are over 70 and a half that don’t qualify for other deductions but are charitably inclined, there is something pretty important that you can do. Tell us about that.

Rachel Sheedy: Yeah. So it’s the qualified-charitable distribution move to QCD, what it’s sort of commonly known as. And it’s a move that had been around for a number of years but wasn’t made permanent until just a couple of years ago. So you have to be 70 and a half or older. You have to be qualified to take required minimum distributions. But if you meet that age requirement, you can directly transfer from your IRA to charity up to a hundred thousand dollars. And that money that you transfer to charity can count toward your RMD, and that money will not show up in your adjusted gross income. So it’s great for people who are no longer itemizing and are charitably inclined, they can, essentially, get a tax break for giving money to charity by doing the qualified charitable distribution move. But it’s also actually good for itemizers too. So if you are still one of those people itemizing, because the QCD does not show up in your AGI, any tax break that’s based off thresholds that are tied to AGI, you might qualify for because your AGI is lower by doing the QCD. So, it’s something to look at no matter how you, if you do standard deductions or itemized, take a look at it if you qualify.

Steve Pomeranz: And, for all intents and purposes with the elimination of a lot of the itemizing, people really can’t get a deduction on their charitable contributions anymore.

Rachel Sheedy: Yeah. It’s really hard if you no longer have, say, mortgage interest, which is a big tax deduction for many people. You would have to make a lot of charitable deductions to surpass the standard deduction amount. So, this qualified charitable distribution move allows you to still sort of get a tax break and give to charity at the same time, which is a good thing. Most people want to try to do that.

Steve Pomeranz: Yeah. So if you’re charitably inclined, there’s no question that this QCD is a very, very good idea. All right. Let’s talk about some of the kind of the tried and true methods. First of all, harvesting your losses. A lot of people have losses in their portfolio. I mean, it’s inevitable if you have a diversified portfolio that you’re going to have some losses, but a lot of people like to hang onto their losses and sell their gains, which is kind of the opposite of what you should be doing.

Rachel Sheedy: For sure, yes. Definitely.

Steve Pomeranz: It’s like cutting your good flowers in the garden and letting the weeds grow. It doesn’t make any sense.

Rachel Sheedy: Some people are optimistic and think that it will come back.

Steve Pomeranz: And they’re optimistic. Yeah, exactly. That’s right. That sucker’s coming back, I know it.

Rachel Sheedy: Right. Exactly.

Steve Pomeranz: Right. So, but a loss has value. That’s kind of an asset in a sense because that amount of a loss can be used as a qualified or a verifiable deduction. And you can save taxes on it, and then 31 days later, you can buy it back. So your only risk is that you’re out of that thing for 30 days or 31 days.

Rachel Sheedy: Yeah. You do need to watch for that Wash-Sale-Rule, as it’s called. But, yeah, and I think a lot of people, the stock market has been going gangbusters for a number of years, at this point. So some people might not think to look for losses. But, it’s true, if you’re with a diversified portfolio, not everything goes up when the market goes up. So, it’s definitely something to scour your portfolio for and see if you can take advantage of those losers.

Steve Pomeranz: Well, that’s how you know your portfolio is diversified. If everything is going up together, guess what guys, you are not diversified.

Rachel Sheedy: That’s a good point, yes.

Steve Pomeranz: You need some things yinging and yanging so you can look at your portfolio and kind of, in a very surface way, determine whether you’ve got some diversification here. But you’re right, with the market being up so much—as we air this show anyway—because you never know what’s going to happen, then most investors really have pretty significant gains this year. But if you look closely, you will, in fact, find some losses, I’m sure of it. My guest, Rachel Sheedy from Kiplinger’s Retirement Report. And today we were discussing year-end moves that you can make for your 2019 taxes, looking a little bit ahead to 2020, looking at some charitable things that you can do. And thank you so much for joining us, Rachel.

Rachel Sheedy: Thank you for having me.

Steve Pomeranz: And remember, everybody, that we love to educate our listeners, and we continue to remind you that we love to get your questions because we really do. So, come to our website at stevepomeranz.com. Go to the contact section and write us a question. If you have any, we will answer that question. We make every effort to do so. And also while you’re there, you can sign up for our weekly update where you can get right into your mailbox every single week, what we call the WU, the weekly update, which gives you every single segment, transcripts if you’d rather read than listen, a summary if you just want a quick idea of what’s going on. And then, of course, a way to contact us with your questions, go to stevepomeranz.com. P-O-M-E-R-A-N-Z. Skip the T, go right to the Z. And of course, Erica, my producer is shaking her head negatively when I say that. She hates that. Anyhow, stevepomeranz.com, and we would love to hear from you. stevepomeranz.com.