Year-end tax tips
This is the second year of the so-called, “Trump Tax Cuts” aka Tax Cuts and Jobs Act, enacted at the beginning of 2018. Controversies around these cuts, other than adding to the national debt, is that it capped itemized deductions to $10,000, including state and property taxes. Californians and New Yorkers with large properties and high incomes may be facing a larger tax-bill, even if the marginal rates shifted more favorably across the board. So what, if anything, can people do before this tax year comes to end? Here are a few things to consider.
First, keep in mind, that for many people these tax cuts might be favorable over the long run. If you think that tax rates will increase in the future, then it may be prudent to tax the bulk of your income now so that you won’t have to later. Ways to do this are to fund a Roth IRA, Roth 401(k), or save to a taxable investment account. This money has already been taxed and you’ll benefit from years of tax-free or preferentially taxable growth.
Fully fund your 401(k) or workplace retirement plan before the end of the year. The maximum you can contribute is $19,000/yr plus the ‘catch-up’ of $6,000 for people 50+. This increases in 2020 to $19,500/yr, plus the ‘catch-up’ of $6,500.
Fully fund the Health Savings account (HSA), if eligible. You have to have a high deductible insurance policy and then you can contribute up to $3,500 ($7,000 for a family plan). The contribution is tax-deductible, grows and distributes tax-free if used on qualified medical expenses.
Fund a non-deductible IRA and convert it to a Roth IRA. Note that a conversion can be partially taxable if you already have IRA assets. The due date to make the IRA contribution is tax filing (April 15) the following year, however, the conversion would be counted in the current year. If your income is under $137k (single) / $203k (married) then you can contribute directly to a Roth for $6,000/yr, plus the ‘catch-up’ of $1,000 for people 50+.
Contribute to a retirement plan, Solo 401k, SEP IRA, among others. You generally have until tax-filing the following year to make your contribution and the most you can put in is $56,000 for the SEP; sometimes more for the 401(k) and depending on your business income. This increases in 2020 to $57,000.
Use surplus foreign tax credits to help offset the tax on Roth conversions or consider other strategies to put more in a tax-free account.
Realize investment capital gains tax-free if your income is low due to being overseas.
At Eureka Wealth Management, I'll work with your tax advisor to determine the best strategy and will help you implement it. I also do retirement planning and investment management. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
Consult your tax advisor if you have tax questions.