Start with the brackets: Year-end tax planning tips

For tax professionals, the approach of Thanksgiving signals that, while there’s still time for tax planning, the time is limited, with just a month left in 2019.

“Tax planning should begin with gauging taxable income to tax brackets,” observed Glenn DiBenedetto, a CPA and director of tax planning at the New England Investment & Retirement Group. “Establishing tax brackets is the first step in determining the most appropriate strategies, such as accelerating deductions, deferring income and harvesting long-term capital gains under the [Net Investment Income Tax] threshold,” he said.

“Optimum tax planning opportunities are based on special circumstances,” he said. “It’s important to know what bracket a taxpayer is in. A typical long-term move is to defer income and accelerate deductions. This continues to be effective for many taxpayers. However, the opposite is true for many in a lower tax bracket. Accelerating income and deferring deductions may allow the taxpayer to maximise the benefit of a lower lower tax bracket.”

“This can be very helpful in managing annuities,” he said. “Older people buy annuities and defer, defer, defer. But there’s no step-up for their beneficiaries at their death — when they die, their beneficiaries get taxed at their bracket rate, which might be considerably higher than that of the decedent. The same is true of IRAs. It makes a world of sense if you can take out some annuity income in a 10, 12 or 22 percent bracket when the beneficiaries are in the 37 percent bracket. People love to see the zeros on ‘tax due,’ but someone will eventually pay the tax. So it makes sense to take out the income at a lower bracket.”

“Taxpayers may be able to reduce their taxes by contributing as much as possible to IRAs and employee retirement plans,” suggested DiBenedetto. “The CPA can help the taxpayer determine if a traditional IRA should be converted to a Roth IRA. Factors to consider include their current and future anticipated tax status, family situation, and ability to pay the tax due from other sources. High-income earners might consider a ‘backdoor’ Roth IRA, which may enable taxpayers to fund a Roth even if their income is over the regular Roth contribution limits,” he said.

It might be worth it to purposely “harvest” investment losses to offset capital gains that have been realized during the year, DiBenedetto observed. “Keep in mind that net losses up to $3,000 can offset income and any further losses can be carried forward to future years,” he said.

And for those whose estate will potentially be subject to the estate tax, gifting, to either family or charities, can reduce the taxable estate, he noted.

“In addition to reducing the estate, charitable gifting can lower taxable income,” he noted. “In order to take advantage of the benefit of charitable gifting on 2019 returns, the taxpayer must itemize deductions and the gift must be made by Dec. 31, 2019. And for taxpayers 70½ or older that are required to make an required minimum distribution, they can transfer their 2019 RMD to a charity, up to a $100,000 limit. While the donation counts as their RMD, it does not increase their adjusted gross income. This can be particularly helpful if the taxpayer does not itemize and cannot deduct charitable contributions, and also help to avoid the Medicare high-income surcharge, or reduce the taxable portion of social security benefits.”

In 2019, a taxpayer can make personal gifts up to $15,000 a year per recipient without gift tax consequences, DiBenedetto said: “This equates to $30,000 per year for a married couple. The lifetime exclusion amount for gifts is $11,400,000 for 2019.”

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