Don't Mess With Taxes

These carolers, dressed in Dickensian attire, are no doubt singing traditional Christmas tunes, not my reworked and tax-themed "O Tannenbaum." (Photo by Chris Waits via Flickr CC)

O Tax Year-End (O Tax Year Moves)

Yes, that's my attempt at tax lyrics to the tune "O Tannenbaum," known here in the United States as "O Christmas Tree" and, if you're a Marylander (or a former one, like me) that state's official (for now) song.

There are four more lyrics to the holiday standard, but I quit after two because I don't really see a year-end tax tune catching on with the general public.

That's too bad, since each December — and really sooner; check out my November tax moves post — we definitely need to think about O Tax Year-End and related tax moves, if not celebrate them in song.

So, hum along — I mean, keep reading (humming optional) — for 10 tax moves to make during these final few days of the tax year.

1. Look at last year's tax return. Yeah, this is something you should do before you file your tax return (or extension) each April, but it's a good idea to look back before looking ahead. That's especially true now that we're still learning our tax situations under the Tax Cuts and Jobs Act (TCJA).

A lot of old conventional tax wisdom is no longer applicable or wise given the changes we dealt with for the first time this past filing season. The biggie here is itemized vs. standard deductions.

More people claimed the standard deduction before these most-recent tax reform changes. Now even more filers are dismissing Schedule A and the record keeping that entails. If your lifestyle, income and general financial situation is much the same in 2019 and it was in 2018, then you'll likely claim the same tax breaks next spring as you did this year.

That lets you know which of the next 9 possible December tax moves will or won't apply to you.

2. Bunch your itemized deductions. If you find that itemizing will give you a larger deduction amount than the standard one — that's $12,200 for single filers this year, $24,400 for married couples filing jointly — then see if you can make even more of your Schedule A entries.

One way to do this is by bunching. This is where you consolidate deductible itemized expenses into one tax year. If you're near the $10,000 cap on state and local taxes, there's not much you can do here. If, however, you have room to work, consider paying at least some 2020 property taxes this month in order to get the most out of them.

Medical expenses also face a cap, which could be harder to clear on your 2019 return. Unless Congress acts, you'll have to have medical expenses that exceed 10 percent of your adjusted gross income (AGI) before you can claim that excess amount on Schedule A.

It was 7.5 percent and there's a chance lawmakers will retain that lower AGI percentage. But that's not certain. If you're close to getting past 10 percent of your adjusted income, schedule some deductible medical electives to get there.

Your mortgage interest deduction is still allowed. Making your January home loan payment in December can give you some more interest to claim this year.

The same is true for charitable donations, which are still deductible and not limited at all. If you're close to having more in itemized claims than your standard deduction amounts, think about making 2020's charitable contributions now. It could be enough to push you over the limit so you don't lose the value of other itemized claims.

If you want to go further on the generosity front, establish a donor advised fund that you can deduct in full and use the money in that account to make donations next year even if you don't itemize.

Speaking of next year, if you bunch deduction to itemize this year, as I just mentioned, you'll likely claim the standard deduction for your 2020 taxes. That's because when you push or pull items into one tax year, you usually won't have enough to be tax worthwhile the next.

So claim the standard deduction for tax year 2020, pushing expenses that year into 2021 when you'll itemize again.

3. Review your flexible spending accounts. Flexible spending accounts (FSAs) are great workplace benefits. They allow you to set aside pre-tax dollars to pay for such things as child care or out-of-pocket medical expenses.

Most parents easily use up their child care FSA. But a lot of folks overestimate their medical expenses and end up with money in their medical (FSA) at year's end.

Some workplaces allow medical FSA owners a grace period until March 15 of the next year to spend this money. Others let you roll over up to $500.

If you don't get either option, then you have to spend your medical FSA money by year-end or you lose it forever. Check in on the balance of that account now and decide how to spend any excess funds. You might need to schedule a year-end visit to the dentist or optometrist.

4. Review your portfolio for tax-related moves. If you have stocks, you've probably been holding your breath all year. The market's been up and down and you, like economists, are trying to determine whether it's finally going to take that long-feared, long-anticipated nosedive.

If your patience has paid off with increases in the value of your holdings, you might want to take profits now, known in the tax world as harvesting tax gains. You'll cash out on a high note and not have to worry any more about when the market will drop.

It could be a tax plus, too. As long as you've held the assets for more than a year, you'll pay the usually lower capital gains tax rate. The maximum capital gains rate is 20 percent but it's lower, 15 percent and possible no tax at all, depending on your adjusted gross income.

On the other end of the investing spectrum, if you had some stocks that, let's be honest here, stank, sell them, too. Those losses will offset your gains, erasing your tax liability.

Plus, if your tax loss harvesting leaves you with extra losses after countering your gains, you can use up to $3,000 of that amount to reduce your ordinary income. Excess losses beyond $3,000 can be carried forward.

Two quick notes here.

One, when you sell assets, make sure your gains are long term. If you sell assets you owned for a year of less, known as short-term holdings, you'll owe tax at your regular income tax rate unless you have short-term losses to offset them.

And two, if you have six grand or more in losses, get a new financial adviser!

5. Donate appreciated stock or other assets. Perhaps you have stock or other property you've held for quite a while. It's grown in value nicely, but it just doesn't fit into your current financial plan. 

If you sell it, you'll owe the taxes mentioned in #4 unless you have corresponding investment losses.

In these cases, and if you don't need the money (lucky you!), consider donating the appreciated asset directly to your favorite charity. That way, the nonprofit gets the full benefit of the donated asset's value and you don't owe any capital gains tax.

You'll likely be inclined to do this if you itemize. That way, you also get to claim the stock's value at the time of donation as a charitable deduction.

6. Time your income. In some cases, income can be delayed. This is a good move if the added money will push you into a higher income tax bracket.

It's also important to keep an eye on your AGI if you are going to itemize expenses. While the Pease Rule that used to reduce your overall Schedule A deductions if you made what the tax code considered too much money is gone thanks to the TCJA, your still AGI matters when it comes to medical expenses discussed earlier.

Also, other tax deductions and credits could be limited if your AGI is large.

The easiest way to keep your earnings down if you're a salaried worker is to ask your boss to push any year-end bonus into the next year. If you're your own boss, don't invoice for recent work until after Jan. 1.

7. Add to your nest egg. It's never too soon or too later to think about how you'll pay for your retirement. This December, give yourself a future gift by adding to your retirement account, be it an IRA, self-employed retirement plan or 401(k).

It might be too late to add to a 401(k) or similar workplace plan, but check with your benefits office just in case.

As for IRAs, yes you do have until next April's filing deadline to put money into these accounts. But the sooner you contribute, the sooner the power of compounding growth starts working for you.

Plus, putting money into your retirement funds could qualify you for the Retirement Savers Credit and it's always good to know about these dollar-for-dollar tax breaks earlier in the tax process.

8. Convert a traditional IRA to a Roth IRA. This is something you need to think about before pulling the conversion trigger. Whatever amount you move from a traditional IRA, where taxes are deferred, to a tax-free Roth account will produce a tax bill this year.

But with tax rates so low, it might be worth the immediate tax bite. And once the retirement funds are converted into a Roth, you won't have to worry about taxes on this account ever again. Plus, with a Roth you don't have to worry about tax rules that make you take out money when you turn 70½ (more on this coming up in #9).

Again, consider any conversion carefully.

You don't have to convert the full traditional IRA amount. Determine how much you and afford to pay tax on this year. Also make sure that you don't add so much retirement money to your overall taxable income pool that you bump yourself into a higher tax bracket.

9. Donate your required minimum distribution. If you have a tax-deferred retirement account, either an IRA or workplace plan, Uncle Sam's patience on when he gets his tax cut is limited.

Specifically, he makes you take out some of this taxable-upon-withdrawal money when you turn 70½. These are known as required minimum distributions, or RMDs, and you must take a set amount that's based on your nest egg value, your age and your expected life expectancy (the Internal Revenue Service has tables to help you figure the amount) in the year you hit that septuagenarian half-birthday mark.

Depending on how much you've saved in tax-deferred retirement funds, your RMD could produce a big tax bite just at that of life where you're looking to spend on your bucket list, not pay added taxes.

If you're lucky enough to not need the RMD to cover living expenses, you can avoid the tax bill by making a direct transfer from your traditional IRA to an IRS-qualified charity.

This transfer method is key. A qualified charitable distribution sends the RMD directly to a charity of your choosing. Since you don't get the money, it's not taxable income to you and your favorite nonprofit gets the benefit of your generosity.

The only downside is that, since you didn't take the money, you can't claim a charitable deduction. But most older folks claim the standard deduction anyway. And even if you could use it and don't with an IRA-to-charity direct transfer, the amount of untaxed RMD probably will make up for any lost tax deduction.

10. Give to family and friends. I'm not talking about that video game for the grandkids or that Apple watch your husband or wife has been hinting about for months. I'm talking the gift of green. Moolah. Cash.

Yeah, I know. Money gifts crass. They also can help with your estate planning.

The TCJA nearly doubled the amount that you can bequeath in death and shield it from federal estate and gift taxes. That same amount also applies to the amount of your estate that you can gift without worrying about taxes over your lifetime.

Before the 2017 tax reform changes, this gift and estate tax exemption was $5.49 million per person. For a married couple, that's $5.49 million per spouse.

For 2020, inflation kicks up the lifetime gift and estate tax exemption to $11.58 million per individual, up from $11.4 million in 2019.

The gifts are not limited to dollars. You can give assets valued up to the limit, such as real property and family heirlooms as long as they are worth up to or less than the limit without incurring any gift tax responsibilities.

Even better. you can use all or part of this exemption while you're still alive. So instead of making your heirs wait until the reading of your will, give gifts against the exemption amount while you're around to see the joy they give the recipients.

I know I loved getting the antique German clock my grandmother left me. Before she passed, it sat for years in storage. I wish I'd know she was leaving it to me or had given it to me when she moved into a smaller place so I could have thanked her.

Any estate exemption left upon your passing then can be used by your heirs to reduce or eliminate any potential estate tax, which is a 40 percent rate, on your remaining property.

In addition, you also can hand out money gifts to your family and friends. There's another limit here, an annual gift exclusion amount. But it's a pretty hefty sum: $15,000 per person for 2019 and 2020 tax years.

FYI, this generosity is NOT limited to family, so if you have some spare cash and really enjoy the ol' blog, just let me know.

Also, here's a tip for grandparents with some cash to spare. Instead of giving your $15,000 gift directly to your grandchild, you can pay a student's tuition directly to the school and not count it as a gift under the gift exclusion rule. The school can be any educational institution, not just college. That frees up more to give against your estate.

Even if your gifts use up your entire exemption, that's not necessarily a bad thing. Your loved ones get your gifts and family heirlooms tax-free early, allowing them to enjoy them (along with you) longer. And in the case of financial gifts or assets, they get the benefit of the gifts' potential growth.

More year-end tax moves: I know. This list is longer than your youngsters' letters to Santa. Sorry about that.

But hopefully some of these moves will make a nice tax-saving present for you. Just remember that in most cases, the tax tasks must be taken care of by Dec. 31 to affect your 2019 tax bill.

You also might want to check out a few more tax-saving ideas in the December Tax Moves over in the ol' blog's right column. They're just below the bright red heading of the same name, just under the countdown clock ticking off the time left here in tax year 2019.

Give all these year-end tax move options a look and take advantage of those that fit your financial and tax situations.

They could provide you some nice holiday tax presents, as well as give you much to celebrate as your ring in the 2020 tax year!

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