It’s close to the end of the year, with the holidays practically upon us, and before we know it we will be ringing in New Year 2020. The next few weeks go by very quickly as we busy ourselves with gift-giving, parties, and end-of-year functions. However, if one of your goals is to save more money next year, an important consideration that you should not lose sight of are the tax-related strategies to implement now — before the end of the year — that will benefit you later, come tax season.
Did you know that amongst the very wealthy, their primary monetary concern is not how to make more money, but rather, how they can best keep more of what they already earn — by saving on taxes? That’s a lesson we can all do well to learn. No matter your individual financial circumstances, you may be able to save significantly come tax-time if you make some changes now, before the end of the year. Let’s look at some of the most advisable actions you can take...
Max Out Your Contributions to Retirement Accounts
If you’re able, try to increase your 401(k) contribution to the maximum allowed ($19,000 for 2019, $25,000 if you are age 50 or over). There is probably no wiser investment you can make than tax-deferred retirement accounts. They can grow significantly because they compound over time free of taxes. And company-sponsored 401(k) plans are the best deal because employers often match contributions.
You should also think about contributing to an IRA. For 2019, contributions can be made up until April 15, 2020. The faster you fund an IRA though, the sooner it can grow tax-deferred, which can also help reduce your taxable income for the year. For 2019, you can contribute a maximum of $6,000 (plus $1,000 extra if you’re 50 or older).
For those that are self-employed, consider a Keogh plan. It must be established by December 31, but you can contribute to the plan up to the tax filing deadline. The type of Keogh plan you choose will determine the amount you can contribute.
Income tax is based on the year it’s received, so the question is, can you afford to postpone your earnings for the benefit of tax savings? It's not easy for standard employees to postpone wage and salary income, but it may be possible to defer things such as year-end bonuses into the following year as long that’s standard practice by your employer.
Self-employed have much more wiggle room. If you work for yourself or do contract or consulting work, you could delay billings until late in the year, to ensure you do not receive payment until into 2020.
Another option to defer income — no matter if you’re an employee or self-employed — is by taking capital gains in 2020 instead of in 2019.
Keep in mind that an important factor in deferring income is what tax bracket you are in. If you anticipate being in the same (or lower bracket), then go ahead and defer income if you’re able. If however deferring income could put you into a higher tax bracket, you’ll want to reconsider because you’ll be hit with a larger tax bill.
Maximize Charitable Donations
If the standard deduction is the best option for you, consider concentrating your donations into a single year. If you give more in one year, you have the potential of maximizing your itemized deduction for that year.
Additionally, if you’re considering selling a significant amount of appreciated stock (which would result in a large taxable gain), think about donating a portion of those assets directly to a charity. Subject to certain income limitations, you could get a tax deduction for the full fair market value of the donated stock and you won’t have to pay taxes on the gain for those shares.
Many charities cannot accept gifts of appreciated assets, but you can use a donor-advised fund, to facilitate the donation process. Placing assets in a donor-advised fund provides you the full deduction for the charitable gift that year. Then, you can grant those assets to the charity of your choice over time.
Offset Gains by Selling off Bad Investments
An underappreciated year-end strategy to tax savings is “loss harvesting.” You accomplish this by selling off investments such as stocks to realize losses. You’re then able to use the “losses” to offset taxable gains you may have gained during the year. If losses are more than your gains, you can use up to $3,000 of excess losses to offset other income, and if you have more than $3,000 in excess loss, that can be carried over to the following year. Losses can carry over year after year for as long as you live.
If you’re looking for ways to maximize your take-home income, one of the best ways to do so is to actively explore ways to maximize your tax savings. If you haven’t done this yet, now is the time to do so before the end of the year.