Year End Tax Planning - 2019
Soon it will be the end of 2019 and 2020 will be here before you know it. If you haven't already done so, now is the time of year to start tax planning. If you have to file a 1040 tax form, your taxes are probably complicated enough to require a tax accountant. I used TurboTax for many years and only recently began to use a tax accountant to help me with my taxes. Although it costs a little money, it's a lot less stressful and my estimated payments are way more accurate now. Whether you have a tax accountant or not, here is a checklist of things that you may want to think about to lower your 2019 taxes:
Expenses to accelerate into 2019 (do this if you expect to make the same or less money next year and you are otherwise eligible to take the deduction this year to lower this year’s tax bill):
Pay your January mortgage payment in December (you'll get to deduct the interest in 2019)
Pay all your property taxes in December (be careful if you are subject to the Alternative Minimum Tax, since this may not help reduce your taxes and you may be better off paying the second half in 2020)
If you are eligible to make an IRA contribution ($6,000 for 2019, with no change in 2020), you have until April 15, 2020 to make your contribution and get the deduction for your 2019 tax return; if you are 50 or older you can make an additional catch-up contribution of $1,000. You can make an IRA contribution regardless of whether you participate in a retirement plan at work, but your ability to deduct the contribution may be limited. You can also convert a traditional IRA into a Roth IRA at any time, even if you can't contribute directly to a Roth because of your income level. This is called a "backdoor conversion." Roth's are great because you don't have to pay taxes on the contributions or earnings when you withdraw the money and the withdrawal rules are more flexible than a traditional IRA. You just have to make sure you don't roll over traditional IRA with gains, since you'll pay tax on that (keep in cash until you convert).
Sell investments that have lost money and you no longer want to keep by December 31; the limit is $3,000 of (net) capital losses that you can offset against your ordinary income. Losses in excess of this amount are “carried forward” to future tax years, which means you can't use those losses until you have gains to offset or up to $3,000 against ordinary income per year.
Good news for RobinHood traders: your trading losses can be used to reduce your taxable income, but if you have gains be prepared to pay taxes. Most stock option trading activity is considered short term capital gains or losses and are generally taxed at ordinary income rates up to 37%, depending on your tax bracket (vs long term capital gains rates which are taxed at 0%, 15% or 20%). Be careful when you have trading gains at year end and you have significant losses on unclosed positions - it might make sense to close all your positions at year-end and avoid the tax hit, if they are not likely to turn around in the new year. Also, make sure you pay estimated taxes if you made money on your trading this year!
Delay income from 2019 to 2020 (similar to expenses, if you expect to make the same or less money next year and you are otherwise able to delay the income):
Delay sale of investments with capital gains that you no longer want to hold until January or later
Defer cash bonus payments until January or later
Have your tax accountant check your estimated taxes paid and withheld to make sure you have paid enough so that you won’t be subject to underpayment penalties when you file your return in April. If you have significant investment or other non-wage income like fees, royalties and other passive income, you will likely need to pay estimated taxes.
I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.
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