Few ticks of the clock matter more to your personal tax situation than the one that ushers in the New Year. There are deadlines that must be met, windows that slam shut (particularly with regard to your retirement plans), and all sorts of accounting that resets with every new calendar year.
Because that single moment in time is so important, here are 10 tax-related moves you can make now, while it's still 2019. These can help you today get in a better spot before you have to reconcile the year with Uncle Sam when you file your taxes in early 2020.
No. 1: Get within a "Safe Harbor" for your taxes
Uncle Sam doesn't expect you to know your tax situation perfectly before you have to file in April, but he does expect you to get close. There are three "Safe Harbor" tests that the IRS uses to determine whether you're close enough to avoid penalties and interest for not paying enough of your taxes throughout the year. You only need to meet one of them to pass, but not meeting any of them can substantially increase your costs when you do true things up.
The key tests are that you've paid through withholdings or timely estimated payments enough to:
- Owe less than $1,000 in remaining taxes due.
- Pay at least 90% of what you owe for 2019.
- Pay at least 100% of what you owed for 2018 (110% if you're higher income).
Any money you have withheld, such as via a paycheck or an IRA distribution, is considered timely if the withholding occurs by Dec. 31. So if you think you're at risk of not passing at least one of those three tests, time is rapidly running out for you to get where you need to be.
No. 2: Top off your employer-sponsored retirement plan
In 2019, younger workers are generally allowed to contribute up to $19,000 to their employer-sponsored retirement plans, such as a 401(k), 403(b) or TSP. The general limit in 2019 is $25,000 for employees ages 50 or older. Higher-income employees, regardless of their ages, may have lower limits.
Regardless of your age, however, those contribution limits are based on the calendar year. Once 2020 rolls around, you can no longer make a 2019 contribution to that type of retirement plan. Of course, Jan. 1 will bring with it a new opportunity to contribute for 2020, but that's a whole new year, and your contributions will go against that year's limits.
No. 3: Take any Required Minimum Distributions (RMDs) that you must
Once you reach age 70 1/2, Uncle Sam starts requiring you to take money out of employer-sponsored retirement plans (unless you're still working for that employer) and out of Traditional IRAs. The penalty for failing to take your RMD is 50% of the amount you should have withdrawn but didn't, and you must take your RMD by Dec. 31 to make it count for 2019 .
If you don't need the money from your retirement account to cover your costs of living, you can simply transfer it to a standard investment account and let it ride from there. Alternatively, you can use a Qualified Charitable Distribution to give the money directly from your retirement account to a charity and let that charitable distribution count against your RMD. Even then, the transfer must be completed by Dec. 31 to make it count for 2019.
No. 4: Donate to your favorite charities
If you itemize deductions, donating to a charity between now and the end of the year can both increase your impact on the charity and lower your income tax burden for the year. Note that the Qualified Charitable Distribution listed above is excluded from your income, so that type of charitable contribution is not also deductible. An ordinary contribution -- of cash or stock, for instance -- can be deductible, to a level of up to 50% of your adjusted gross income if you're feeling particularly generous.
No. 5: Make partial Roth IRA conversions if it can help you out over time
Those RMDs increase as a percentage of your account balance as you age. If you have a decent balance in your Traditional IRA or 401(k) plan that continues to grow, that can lead to ever larger mandatory distributions. That can force your income up high enough to make more of your Social Security taxable and perhaps even increase your Medicare premiums as well. That's in addition to the income taxes you'll owe on the distribution itself.
By converting your retirement accounts to Roth IRAs while you're younger -- before the RMDs kick in -- you can have more control of the timing and amount of your taxable income. That can reduce those distributions later. Doing so also gets more of your money growing in a potentially tax free account, where it can benefit you -- or your heirs -- even more.
No. 6: Realize capital losses to lower your income
You can offset capital gains you've realized throughout the year with capital losses, and if you realize more losses than gains, you can even offset up to $3,000 of ordinary income with those capital losses. While net capital losses in excess of $3,000 will carry over to next year, from a 2019 perspective that $3,000 is the most you can use within the year
In most cases, you have until Dec. 31 to realize your capital losses and have them count in this year, but if your loss involves closing out a short sale, you have to move a bit faster. In that case, your transaction has to settle by Dec. 31 to count for the end of the year, which means you'll want to get it done a few trading days earlier.
No. 7: Determine whether it makes sense to prepay your property taxes
If you've been billed in 2019 for property taxes that are due in 2020, you can pay those taxes in 2019 and potentially take a deduction against your 2019 income from them. Note, however, that bunching property taxes is less valuable from a Federal income tax perspective than it used to be. This is because the Tax Cuts and Jobs Act limits the deductibility of state and local taxes to $10,000 per year.
Still, many jurisdictions offer discounts if you pay your annual property taxes in full when first billed instead of spreading them out over the course of the year. As a result, even if the Federal benefit isn't what it used to be, it still might be worth your while to get your property taxes paid early if you can.
No. 8: Contribute to get your state deduction for your 529 plans
Money you save inside 529 college savings plans can grow tax free if used to pay for qualifying educational expenses. In addition, many states offer income tax deductions to residents of the state that contribute to that state's plan.
Some states have recently increased the deductions they offer for contributions. So if you're still contributing based on the old limits, now may be a good time to look and see if you can both lower your taxes and increase your college savings at the same time.
No. 9: Find a use for any "use it or lose it" money in your Flexible Spending Account (FSA)
If you have a Flexible Spending Account to help you pay for medical needs, you generally have to spend the money by the end of the year, or you lose it forever. So if you have deferred medical needs -- such as for new glasses, contact lenses, hearing aids, or dentures -- and unused money in your FSA, now is the perfect time to use it. Otherwise, you'll lose the money and still have the need.
Note that some FSA plans do offer carryover extensions beyond the end of the calendar year, but those extensions tend to be very limited. So even if your specific deadline isn't Dec. 31, it makes sense to at least think about how you will put that "use it or lose it" money to use for you while you still can.
No. 10: Now's the time to give substantial gifts to your children, tax free
In 2019, any person can give any other person a gift of up to $15,000 without having to pay a gift tax on the amount or to file and claim it as a credit against his or her lifetime exemption. That limit applies to gifts from any one person to any other person. As a result, if you're married and your child is married, you and your spouse can effectively transfer $60,000 gift tax free to your child and that child's spouse.
The way that works is as follows: You can give $15,000 to your child and another $15,000 to your child's spouse. Your spouse can also give $15,000 to your child and another $15,000 to your child's spouse, for a total of $60,000 transferred from couple to couple within the year. Note that the $15,000 limit applies to total gives within the year. As a result, if you've been giving birthday, holiday, or other gifts throughout the year, be sure to take those into account if you're considering any end-of-year gifts.
The clock is ticking
While these tax related moves can benefit you and/or those you care about, you've got to move quickly. All of them have deadlines approaching, and once the New Year hits, your ability to leverage them either slams shut entirely or diminishes substantially. So get moving now, and know that when tax filing season hits early next year, you'll be in a better spot overall than you otherwise would have been.