Can you believe it’s already November? 2019 has gone by quickly and it won’t be long before we’re ready to turn the calendar pages over to 2020. When it comes to your finances, there are a number of things that you can do to finish the year on the right note to maximize your earnings. How you handle your taxes this time of year is extremely important.
With that in mind, here are some wise year-end tax strategies according to the financial experts at Illumination Wealth:
If you don’t need the money right now, you can consider deferring some of your income. If you get year-end or holiday bonuses and your company allows you to postpone the payment until 2020, you should consider it. It will then not count toward your taxable income for this year. It will count toward next year’s, though, so it’s mostly a matter of whether you want to pay taxes on it now or later. It usually matters most if the deferred income will keep you in a lower tax bracket this year.
Self-employed individuals and freelancers have even more leeway. You can delay some billing until late in December so that payment is not received until next year.
There are a few different tax deductions that you can take advantage of late in the year to help you when filing your 2019 taxes:
Note: If you are already in the alternative minimum tax (AMT), accelerating certain tax deductions can actually cost you more money. Understand how AMT works before trying to increase your year-end deductions.
Some might call it “loss harvesting.” It is the practice of selling off poor-performing stocks, mutual funds and other investments. You will be able to use the losses to offset any taxable gains. You can also carry up to $3,000 in excess loss into the next year.
If you are not already contributing the max amount toward your 401(k) or other retirement savings account, increase your contributions at the end of the year. As long as you can afford it, this is a good way to reduce your taxable income for the year.
Many parents will invest money under their children’s names (often used for college expenses for dependents under the age of 24). However, if the child’s investment income exceeds $2,200, you could end up paying more taxes. Watch those investments carefully to avoid the “kiddie tax” penalties.
Once you reach the age of 70.5, you must start making regular minimum distributions from your traditional IRA. If you don’t take out enough, the penalties are costly. You may also want to ask your IRA custodian to withhold tax from the payment, which is a voluntary option that can be a smart move depending on your situation. Please note that minimum distributions only apply to traditional IRAs and not Roth IRAs.
If you have a flexible spending account (FSA) as part of your employee benefits package, it can be used for child care or medical bills. It is a nice way to set aside extra money for when you need it. However, that money is basically “use it or lose it.” You must make sure it is being used. The IRS does allow a grace period through March 15, 2020, but keep a close eye. You can also review the amount you spent this year to determine your contributions for next year. You may want to contribute more or less depending on what FSA funds you have used in 2019.
These are some helpful year-end tax tips. For help with your tax planning and other smart year-end financial moves that you should be making—along with building a sound long-term financial plan—count on the team at Illumination Wealth to guide you in the right direction. Contact us today for a no-obligation personal consultation.