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Year-End Tax Strategies

The holidays are fast approaching and the new year is coming right behind. The holiday season is always a joyous time, filled with numerous social outings and special family memories. Aside from focusing on staying within your budget while shopping and limiting the number of goodies you eat, there’s another thing you should remember to pay attention to this time of year—taxes.

Taxes may not be as festive, but you can save a lot of money if you are proactive with your finances before the ball drops on New Year’s Eve. Here are some year-end tax strategies that you may benefit from.

Prepay Tuition
If you have a college student, consider paying next term’s tuition before December 31. Any tuition you pay for the first four years of undergraduate study is eligible for the American Opportunity Tax Credit. This can save you up to $2,500 per student on your tax bill depending on your expenses and income. If you are the one doing the studying, you may be eligible for the Lifelong Learning Credit.

Contribute to a 529 Plan
If you’re still working on saving for college, then you may benefit from putting some money into a 529 plan before the year’s end. This won’t help with your federal tax bill, but it might lower your state taxes. Arizona and many other states allow deductions for contributions to the state’s 529 plan and some even allow them for contributions to other plans.

Contribute to Charity
Contributing to charity can lower your tax bill if you itemize your deductions. And it doesn’t have to be just money that you donate. Clean out your closet and kitchen cabinets and take a box over to your local 501(c)(3) thrift store. As long as they give you a receipt for the donation, you will be able to itemize and deduct whatever the fair market value is for the items.

If you have appreciated stock, you can get an even greater benefit by donating it to charity. You get to deduct the fair market value of the stock as a charitable contribution and the charity is not liable for the capital gains.

Open a Donor-Advised Fund
With the new, higher standard deduction created by the Tax Cuts & Jobs Act, those who are charitably inclined are turning to donor-advised funds in droves. Donor-advised funds work as charitable giving savings accounts where you get a deduction when you put the money into the fund, not when you distribute it to a charity.

If your itemized deductions are close to the standard deduction, you can open a donor-advised fund and put a large sum of money into it in 2019. You will get to take the tax deduction for this year but hand the money to charities in 2020. Then, in 2020, you may not have deductions for your charitable giving, but you can still take the standard deduction.

Take Your Required Minimum Distribution
If you are age 70½ or older, then you are required to take minimum distributions from your retirement accounts (except Roth IRAs). In the year that you turn 70½, you have until April 1 of the following year. After that, the money must come out of your account by December 31. Failure to withdraw the proper amount will subject it to a 50% penalty tax, so make sure to take your required distributions by December 31!

Convert Your IRA
If you have lower income than normal in 2019, then it might make sense to convert your traditional IRA to a Roth. In doing so, you would pay the income taxes on the money now, at your 2019 rates, so that you could take all withdrawals tax-free in retirement.

Another benefit of having your money in a Roth account is that it is not subject to required minimum distributions as discussed above. Once your money is in a Roth IRA, you can leave it in there to grow as long as you’d like.

Empty Your Flexible Spending Account
Flexible spending accounts are provided by your employer to allow you to make qualified dependent and healthcare payments pre-tax. However, they are “spend it or lose it” accounts where you can only roll over $500 from one year to the next. If you have a flexible spending account, make sure to spend the money before December 31 so that you don’t lose it.

Harvest Your Tax Losses
The IRS allows investors to offset their capital gains by capital losses. If you own a losing stock, now might be a good time to sell it so that you can use the loss to lower your capital gains and, therefore, your tax bill.

Max Out Your Retirement Account
Another way to lower your income and, therefore, your tax bill, is by deferring that income until retirement. In 2019, you can contribute up to $19,000 to a 401(k) plan, which will remove that money from your current taxable income. Contributions to traditional IRAs are also tax-deductible, subject to income limitations.

Establish a Retirement Account
Business owners may not have an employer-provided 401(k) to contribute to, but that doesn’t mean they can’t set up their own. As a business owner, there are a number of options available to you, including a solo 401(k). A solo 401(k) has to be set up before December 31 but you have until the due date of your tax return (including extensions) to fund it for 2019.

How We Can Help
As you can see, there are a lot of smart things that you can be doing in the last few weeks of the year besides just limiting your eggnog intake. If you need help implementing any of these strategies or want to learn more about what we do for our clients, contact me today at 480-214-9596 or info@scfinancialservices.com.