Hello, July! The heat is definitely on, but there are plenty of ways to chill out, both personally and to put your 2019 tax bill on ice.
Yes, I know you want to head to the pool or beach or catch up on neglected novels or just be generally lazy. I'm right there with you.
But you'll enjoy those recreational pursuits a lot more once you've taken some steps, like the seven listed below, to lower your 2019 tax bill.
Let's get to 'em!
1. Get weather ready.
A low pressure trough moved overnight from Georgia to the Florida panhandle and is very near the coast. It's expected to continue southward into the Gulf of Mexico, where the warm water could help it develop this week into a tropical depression and possibly into Barry, the second named storm of the 2019 hurricane season. Although the storm season has been slow to develop this year — I'm definitely not complaining! — it only takes one.
UPDATE, Thursday, July 11, 2019: It's official. Tropical Storm Barry is headed for Louisiana.
And as the recent major earthquake in Southern California reminded us, Mother Nature can reveal her Mommy Dearest side at any time, in any place and in many forms.
We can't prevent natural disasters, be they tropical systems, severe thunderstorms, tornadoes, wild fires, floods, earthquakes or blizzards, but we can prepare for their arrival and aftermath. The ol' blog's special Natural Disasters Resources pages that have physical and financial preparation and recovery tips, as does this recent post specifically on how to prepare for an earthquake.
2. Set up a bunching strategy.
A bunching strategy will help you have enough qualified expenses to meet some of the itemized deduction thresholds. Basically, you push or pull as many of your allowable expenses as you can into one tax year.
While fewer filers itemize now that the Tax Cuts and Jobs Act (TCJA) greatly expanded the standard deduction amounts and reduced some allowable itemized expenses, some taxpayers still will find filling out a Schedule A is better for them.
Pay particular attention to your medical expenses if you itemize. The TCJA kept the medical expense deduction floor at 7.5 percent of adjusted gross income (AGI), but only for tax years 2017 and 2018. For 2019 filings, medical expenses must exceed 10 percent of AGI, unless Congress acts on a tax extenders proposal to keep the 7.5 percent level for a few more years.
You also could pull some home-related interest deductions into 2019 by making one or more extra mortgage payments before year's end. By doing that, those loan interest amounts, in most cases, can be claimed as an itemized deduction.
And of course, your donations to IRS-approved charities still are deductible. If you're close to getting more itemized expenses than your standard deduction amount, you can double up and make your usual 2020 charitable gifts in 2019 along with this year's donation amounts.
3. Pay off home-related loans.
Speaking of itemized expenses, the TCJA now limits the tax deduction value of home-related borrowing, typically home equity loans and home equity lines of credit (HELOCs). Before tax reform, interest on a home equity loan or HELOC was fully deductible.
Now, the interest can be claimed on Schedule A only where the borrowed money is used to buy, build or improve the home securing the loan/HELOC. If you have a home equity loan that now is no longer tax deductible, look into paying it off since the tax law change eliminates the tax-deductible benefit.
4. Finish up your charitable spring cleaning.
Speaking of itemized expenses again, take another tour of your house and see if there are items — clothing or furnishings that no longer fit you or your home design style — that would be worth more to others.
By Marie Kondo-ing your house and giving items you no longer want or need to charity, you'll help out the nonprofits, especially in the typically donation slow summer. Plus, as an itemizer you'll be helping your tax bottom line since charitable donations are tax deductible.
5. Boost and/or realign your retirement funds.
The slower pace of summer offers us a tantalizing look at what our future retirement could be like if we save enough now. To ensure you can enjoy 12 months of fun when you finally call it quits at the office, add to your retirement accounts. Inflation adjustments for the 2019 tax year have bumped up the amounts you can contribute to a workplace 401(k) plan (or similar accounts at different types of employers), as well as to either traditional or Roth IRAs.
You also might want to consider converting your traditional IRA to a Roth. It could make sense now that individual ordinary tax rates, which are what distributions from these plans are taxed at, are at their lowest levels in years.
Make sure, however, it's what you want to do, especially since the TCJA eliminated the option to recharacterize, aka undo, Roth conversions. Such reversals came in handy when your personal financial circumstances or retirement account value changed after you moved traditional retirement funds to a tax-free Roth and now don't want to or can't pay the tax on the converted amount.
If the loss of the Roth reversal option is a concern, consider converting incrementally. You can move a small amount of your traditional IRA now and, depending on what the market is doing, convert more to a Roth as the year end nears.
6. Hire your children.
The happiest people every summer are your kids. For about a week after school is out. Then they tend to whine about being bored. If you own your own business, shut down those complaints by hiring your kids. It's a win-win-win.
First, you'll know what they're up to and can guarantee they aren't bored!
Second, they'll earn some cash, which, admit it, you would have given them anyway. While the summer job means they could owe tax on their earnings, unless you're an unbelievably generous boss, the young workers will be in in a low tax bracket, probably the lowest given the expansion of the brackets under the new tax law. And the larger standard deductions — a $12,200 standard deduction for single taxpayers for the 2019 tax year — mean that much (or all, again unless you're a very well-paying boss) of your child/employee's income is essentially tax-free to him or her. An added bonus is that your children can start developing good financial tax habits by putting at least some of those earnings into their own Roth IRAs.
Third, you'll get some tax breaks as a small business, like deducting their wages. Plus, you don't have to bother with Social Security, Medicare or federal unemployment (FUTA) taxes for your younger-than-18 summer employees.
7. Adjust your withholding.
I know, I know. I'm a broken record here. But, one more time, if you got a big tax refund this year or owed Uncle Sam, you need to reassess your payroll withholding. A withholding review is especially true with the TCJA tax rates and income brackets changes. The Internal Revenue Service has a new W-4 and revised its online withholding calculator reflecting those changes. Make good use of them now while there are still almost six months for the changes to show up in your paychecks.
Or, if you're on a tax roll, you also can check out a few more July Tax Moves to make over there in the ol' blog's right column.
If the moves in this post or some of the others listed in the adjacent column apply to your personal tax situation, take advantage of them. The tax savings they could just might help pay for your well-deserved summer vacation.