The fourth quarter is here already—so it just might be the right time to consider our seven tax tips to remember for year-end planning.

1. Maximize your retirement savings.

If you turned 50 this year, you’re entitled to make a catch-up contribution of $6,000 for your 401(k) if your plan allows. It’s not too late to catch up for 2019. Also, anyone with compensation can contribute to a traditional IRA1. It’s the deductibility of the IRA contribution that is subject to income limits. Unfortunately, Roth IRA contributions do have income limits.

In January, you can make your 2020 IRA contribution. Why not consider making the IRA contribution at the beginning of the year.

IRAs and Defined Contribution Plans 2019

IRA Contribution Limit ……………………………………………..$6,000
IRA Catch-up Contributions ………………………………………$1,000
SEP Maximum Contribution ……………………………………..$56,000
SIMPLE Maximum Contributions………………………………$13,000
Catch-up Contributions …………………………………………….$3,000
Elective Deferrals [401 (k) and 403(b)]……………………….$19,000
Catch-up Contributions …………………………………………….$6,000
Defined Contribution Limits………………………………………$56,000
Source: Internal Revenue Service.

2. Review where you are at with capital gains and losses.

Mutual fund capital gain distributions typically are announced during the fourth quarter. After taking distributions into account, what should you, if anything? If you are in the 22% or higher tax bracket, tax-loss harvesting may make tax sense. You can harvest losses in excess of your gains but are limited to taking $3,000 in losses in excess of gains. Losses not used in 2019 can be carried forward indefinitely for federal tax purposes.

There is a long-term capital gain tax rate of 0% in the two lowest (10% and 12%) marginal tax brackets. If you have projected taxable income of you may want to recognize long gains, which could be taxed at a 0% federal tax rate. Tax-gain harvesting can be a tax-smart idea.

3. Time to review itemized deductions for 2019

Results for the 2018 tax filing season indicate the number of taxpayers itemizing is down because of the increased standard deduction and the state and local taxes (SALT) deduction being limited to $10,000 for married and single filers. To itemize tax deductions, you will need to exceed the standard deduction. The standard deduction is something the government gives each taxpayer. Also, taxpayers don’t have to complete Schedule A – Itemized Deductions.

Standard Deduction

Filing Status…………………………….Tax Year 2019
Married Filing Jointly……………….$24,400
Single……………………………………….$12,200

Given the significant changes to itemized deductions, we believe a key consideration for itemizing will be charitable contributions. Let’s look at various ways to make charitable contributions.

• First, filers need to make charitable donations by year-end. Contributions are deductible in the year they were made. Therefore, donations charged to a credit card before the end of 2019 count for 2019. This is true even if the credit card bill isn’t paid until 2020. Also, checks count for 2019 as long as they are mailed in 2019.
• Consider gifting appreciated securities instead of cash, since gifting cash is very tax-inefficient. Gifting stock with a fair market value of $5,000 with a cost of $1,000 could save $952 in tax ($4,000 X 23.8%); plus, you will still receive a charitable contribution deduction. The top marginal tax bracket’s federal long capital gain rate is 23.8%

4. Advanced charitable planning: Qualified charitable distribution.

If retirees find themselves no longer a good candidate to itemize and are charitably inclined, you should consider a qualified charitable distribution (QCD). A QCD allows a tax-free transfer (up to $100,000) directly from an IRA to a qualifying charity. You must be age 70½ at the time of the distribution to be eligible. Also, a QCD must be done by December 31, 2019, to count for the current tax year.

When a taxpayer elects to make a required minimum distribution (RMD) a QCD, the taxpayer does not pick up the RMD as income but also does not take the charitable contribution deduction. If you are not planning to itemize, a QCD can be a tax-smart idea.
Donating the RMD to charity should reduce both adjusted gross income (AGI) and taxable income. Reducing income can produce potential tax benefits, such as:

• Reduced Social Security benefits that are taxed.
• If AGI falls below $250,000 for married filing jointly (MFJ) or $200,000 for single, investment income will no longer be subject to the 3.8% Net Investment Income Tax.
• Future Medicare premiums could be reduced.

The “lump and clump” Strategy

As mentioned above, taxpayers who used to itemize may not be doing so unless they engage in some proactive planning before year-end. Here is an example: Mr. and Mrs. Smith, ages 55 and 54 respectively, have the following 2019 projected itemized deductions:

Itemized deductions projected

Taxes paid……………………………………$10,000 (limited)
Interest paid…………………………………$11,000
Gifts to charity………………………………$2,500
Total deductions……………………………$23,500

(That’s less than the standard deduction of $24,400, so the Smiths will not itemize.)
What can the Smiths do? One strategy is known as the “lump and clump.” Instead of gifting $2,500 to charity in 2019, why not consider “lumping” four years of charitable donations in 2019. Then “clump” those donations into a donor-advised fund.

Itemized deductions projected (with lump and clump)

Taxes paid………………………………………..$10,000 (limited)
Interest paid……………………………………..$11,000
Gifts to charity………………………………….$10,000
Total deductions……………………………….$31,000

Though the Smiths may not want to dispense $10,000 of charitable contributions in one year, what can they do? They could “clump” the $10,000 in contributions into a donor-advised fund (DAF). The Smiths will receive an immediate tax deduction for the contribution to the DAF. In the future, the Smiths can decide what charities will benefit, but in the meantime, the monies can be invested. A final note: DAFs accept appreciated securities but will sell them once contributed with no tax bill back to the Smiths.

5. Almost everyone is in a lower tax bracket now.

This might be a good time to take advantage of the lower tax rates and consider doing a Roth conversion by December 31, 2019. Roth conversions don’t always carry a tax bill. You can mitigate the tax bill by pairing tax strategies. For instance, you could increase charitable deductions to match the amount of your Roth conversion. Maybe a passive activity with suspended losses becomes unsuspended and that is a great time to consider a Roth conversion. Remember there are no income limits for Roth conversions.

6. If you are considering gifting to family or friends, try to do it by the end of the year. 

Taxpayers can give up to $15,000 to anyone without filing a gift-tax return. Consider gifting appreciated securities, which removes the gain from your portfolio and possibly reduces the tax bill on the sale if the recipient has a lower tax rate than the gifter. Consider not gifting portfolio losers; it may be better to take the loss because you might need it someday.

7. Why pay tax now when you could pay later?

Generally, taxpayers want to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate charitable contributions, state and local income taxes, and interest payments.

Tax planning is a year-round exercise that requires active participation. If you want to lower your tax bill, work with your financial advisor and tax coordinator.

We trust these 7 tips will guide during your year-end tax planning time and are happy to discuss these items or answer any questions that arise.

Please note that charitable substantiation requirements apply per IRA pub 1771: “A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization.”The donor must get the acknowledgment by the earlier of the date the donor files the original return for the year the contribution is made, or the due date, including extensions, for filing the return. Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI).Investing involves risk, including possible loss of principal. Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

©2019 SEI 191042.01 IAS (10/19)

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