What's the difference between death and taxes? According to Will Rogers, "Death doesn't get worse every time Congress meets."
Whether you love or hate Congress' tax moves, you don't want to pay more than you have to. As the year comes to a close, it's a great time to review your 2019 tax situation and make some money moves of your own. And no, we're not suggesting you read 74,000 pages of tax code to find a loophole. Instead, try these six simple year-end strategies to soften the blow when it's time to file.
1. Take profits and sell losers in your investment portfolio
Investment losses offset taxable investment gains dollar for dollar. That means you can dump the losers in your portfolio to reduce the tax sting of any profits you take this year. If you can realize enough losses to offset your gains, you sidestep the capital gains tax. Losses that exceed your gains can be used to offset up to $3,000 in other income. And excess losses over $3,000 can be carried forward and used in the next year.
Investment gains are taxed at different rates, depending on how long you owned the asset. If you profit from selling a stock you owned less than a year, the gain is taxed at your normal income tax rate. If you owned the stock for a year or more, the gain is taxed at up to 20%, depending on your tax bracket and filing status.
This distinction is important because short-term losses offset short-term gains and long-term losses offset long-term gains. When you are looking for losses in your portfolio to offset your gains, pay attention to how long you've own those assets and sell accordingly.
2. Review your flexible spending accounts
You funded your flexible spending account all year with pre-tax income. And the trade-off for that tax break was this: You have to spend the 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. You'll want to review your plan details, too, as you may have a grace period for using up your balance.
3. Check in on medical expenses
In 2019, you can deduct qualified, unreimbursed medical expenses that exceed 10% of your adjusted gross income, or AGI. AGI is your income less certain deductions and expenses, such as retirement plan contributions, student loan interest, tuition, and alimony.
If your total medical expenses for the year are close to the 10% threshold, it might be time to schedule that procedure you've been delaying. You can't deduct cosmetic procedures or general healthcare purchases like toothbrushes or gym memberships. But you can deduct the costs of your prescriptions, contact lenses, and hearing aids, as well as therapy sessions, surgeries, and preventative care treatments. You will have to itemize your deductions to claim the medical expenses deduction, so this doesn't apply if you take the standard deduction.
4. Increase your retirement plan contributions
Qualified retirement plan contributions are tax-deductible. The simplest place to look for these deductions is your company-sponsored 401(k), where pre-tax funds are diverted from your paycheck. For the year, you can contribute up to $19,000, or $25,000 if you're aged over 49, to your 401(k).
If you're not already on track to reach the maximum contribution for the year, you may be able to increase contributions through year-end if your plan allows you to update contribution levels on the fly. Check with your plan administrator to find out how quickly contribution-level changes are implemented. Then decide how much extra you can afford to have taken out of your paycheck through year-end and request a contribution increase.
If you and your spouse don't have access to a 401(k), get a tax deduction by dropping some money into a traditional IRA instead. For the year, you can contribute up to $6,000, or $7,000 if you're 50 or older.
5. Adjust your withholding
If you suspect you'll owe when April 15 rolls around, you can always ask your employer to increase your paycheck withholding for these last few weeks of the year. This strategy may help you avoid an estimated tax penalty. Penalties arise when you pay less than 90% of your taxes in the year you earned the corresponding income. In other words, if 12% of your 2019 tax bill is still outstanding when you file your return in April 2020, you'll owe the 12% plus the penalty.
Most often you'll find yourself in this situation if you have sources of income besides your paychecks, such as dividends or business income. An increase in withholdings from your paycheck can help you catch up to your tax bill before the tax year is over.
6. Make tax-deductible charitable donations
If you plan on itemizing your deductions, now is the time to make tax-deductible charitable donations. First, make sure the entity you'd like to support is recognized as a charitable organization under Section 501(c)(3) of the Internal Revenue Code. You can do this by searching for the organization on the IRS website.
Then, keep records of what you give and what those items are worth. At a minimum, you need a receipt for the donation and some documentation of its value. If your gift is worth $250 or more, you'll need written acknowledgment from the charity stating whether you received anything in return. The amount you can claim for the donation is the value of your gift less the value of anything the charity provided to you in exchange.
Plan now to avoid the tax surprise later
A check-in on your taxes now can spare you penalties and a bad surprise later. For help assessing your 2019 tax liability, try our tax calculators -- and then take action if you suspect a shortfall.
It's also not too early to start planning for your 2020 tax bill since the brackets are already published. As for the years that follow, we'll just have to wait and see what Congress has in store for us.