It’s not too late to maximize your deductions or minimize your tax bill for 2019. Take advantage of these tips before the year is over.
Max out on your retirement plan
Making additional plan contributions up to the limit is a great way to lower your taxable income for the year. 401(k) and IRA contribution limits have both been increased in 2019 meaning you can save even more for retirement.
- The contribution limit for employees who participate in 401(k), 403(b), most 457 and other retirement plans is $19,000.
- The limit on annual contributions to an IRA is $6,000. If you are age 50 or older, you can benefit from an additional “catch-up” contribution of $1,000.
Defer Income and Accelerate Deductions
For tax purposes, generally income is taxed in the year received and expenses can be deducted in the year paid. Business owners can use that to their advantage by deferring the receipt of income until after December 31st and making payments or planned purchases prior to year end. This strategy can also be used to maximize the QBI deduction. That allows the individual to lower their taxable income and increase deductions. Hey, why get taxed this year if you can get taxed next year?
It is worth noting that you should not defer the receipt of income if you anticipate being in a higher tax bracket next year. Make sure you forecast your income and growth for the next year before taking this step. If you do anticipate being in a higher tax bracket next year, then it may make sense to do the opposite and accelerate your income to 2019 to take advantage of the lower tax bracket.
Donate to Your Favorite Charity
Giving is always in style. Holiday season makes it more special. You may have clothes you no longer wear in your closet or items you no longer use laying around the house. Now is a good time to donate those goods to a qualified charitable organization and receive a charitable contribution deduction. You can also donate cash or appreciated stock to qualified charitable organizations and reap the deduction as well.
If you are unable to make non-cash or monetary donations then there are hundreds of qualified charitable organizations that you can volunteer with. What’s great about that is, you can deduct 14 cents per mile driven in service of charitable organizations. Make sure you keep good records of your mileage driven, as well as, receipts for monetary and non-monetary donations.
As long as your donations are made by December 31st, 2019, they can be included in your 2019 tax return if you itemize. Before donating to an organization, you should make sure they are qualified charitable organizations by looking them up on the IRS website here. Some qualified charitable organizations are the Salvation Army, Goodwill and the Star Boutique.
Get Rid of Underperforming Investments
If you have stocks, mutual funds or other investments that are underperforming, now may be the time to cut bait and sell. Doing so will allow you to realize a loss that you can use to offset any taxable gains you realized during the year. This strategy is known as “loss harvesting.”
You can deduct up to $3,000 of capital losses ($1,500 if married and filing separately) in excess of capital gains per year from your ordinary income. So you can use your capital losses to offset capital gains and any amount over can be used to reduce other income up to $3,000 ($1,500 if married and filing separately). If your net capital losses exceed the limit, the remainder can be carried over to the following year.
Use Up Your FSA
Flexible spending accounts (FSA) are great ways to avoid paying income and Social Security tax on medical expenses. FSAs are tricky because you have to determine how much to set aside at the beginning of the year and the total amount must be used that year. If you have funds remaining in your account, consider rescheduling procedures that are scheduled for 2020 to 2019. For example, if you have a dental procedure planned for next year, you may want to ask your dentist if you can have it done this year instead.
Please don’t take this as medical advice as it’s always best to go with the recommendations of a trained medical professional.
Another option is checking to see if your employer allows a grace period permitted by the IRS allowing you to spend money earmarked for 2019 on or before March 15, 2020. If that’s not available to you then now may be the time to head to the drug store or consider buying prescription eyewear or schedule a covered exam. There are many uses for the funds outlined in the IRS guidelines. Either way, don’t let your FSA dollars go to waste.