Were you surprised by your tax bill last year—the first year the 2017 tax law went into effect?1
Some were pleased to find themselves suddenly free from the alternative minimum tax (AMT), in a lower tax bracket or able to use the new, higher standard deduction. Some were unhappy with the new $10K cap on deductions for state and local taxes.2
Make sure you know what to expect this year so you can plan thoughtfully—especially if your circumstances have changed. If you suffered losses on your investments, for example, you may be able to reduce your tax bill by harvesting tax losses; alternatively, if assets have significantly appreciated, you may want to generate charitable contribution deductions.
Meanwhile, everyone should take a fresh look, every year, at some core questions. Do you want to make tax-free gifts? Are you taking advantage of your tax-deferral opportunities? It’s time to review annual gift tax exclusions, 529 plans, retirement accounts, deferred compensation elections and more.
The first step is to speak with your tax advisor but here is a quick guide to some key issues to consider now.
Should you offset income?
Ask your tax advisor to prepare a pro forma tax return. This is an unofficial sketch of what your tax return is likely to be if you took no further actions for the year. It can help you decide whether to try to reduce your tax liability, perhaps through tax loss harvesting or with charitable contribution deductions.
Also known as “tax-loss selling,” this is a classic strategy that some taxpayers are able to use to reduce their tax liabilities for capital gains or ordinary income.3
To do it, you sell an investment that has an unrealized loss and use that realized loss to offset already realized gains, or embedded gains that you have in your portfolio that you plan to realize this year.
If you still like the asset, you can buy it back. But be careful not to violate what’s known as the “wash sale rule.” This rule prevents you from taking a tax deduction for a loss realized from trading one security if you buy a security that is substantially identical within 30 days before or after the trade.
If you do not want to be out of the position for an entire month, you can “double up” on your position, then wait 30 days before selling the original loss position. The last day to do so and still be able to recognize the loss in this tax year is November 29.
There are many ways to generate a charitable contribution deduction, including direct gifts to qualified nonprofits. If you’re unsure about which cause or charity you’d like to support, but need the deduction before the end of the year, you might consider gifting to a donor-advised fund (DAF).
A tax deduction for a gift to a DAF is immediate, but the payout to a charitable recipient doesn’t have to be. You might, for example, give now and be eligible for the tax deduction in 2019, but then take the holidays to discuss with family where to commit your philanthropic dollars.
However, you’ll want to make sure you make the donation in time for it to count toward this year.
Do you want to gift tax-free?
Every year, most U.S. taxpayers also have the opportunity to give, tax-free, up to a certain amount, to as many people as they like, and they can use the money for whatever purpose they like. In 2019 with most college accounts, any person, including parents can contribute up to $15,000 as an individual and $30,000 as a couple per child annually without gift tax consequences. Only 529 plans allow five years of tax-free gifts in one year—up to $75,000 per child from individuals and $150,000 from couples.
Parents and grandparents often use their annual gift tax exclusions to fund 529 accounts, which can grow free of federal taxes. There also is no federal tax when the funds are distributed—so long as the money is used for the education of the child named on the account.
Starting last year, up to $10K annually can be used to pay for K–12 tuition without federal tax consequences. But take care! Some states have not adopted this change and may tax distributions used to pay K–12 tuition.
If you are looking to jump start a 529 plan, you can bunch five years’ worth of your annual gift tax exclusion amounts in an account for one recipient; so instead of funding that account with just $15K, you could put $75K in that year, giving it more time to grow tax-free.4
Look at all your tax-deferral opportunities
If you have the opportunity to contribute to a retirement account, we recommend doing so—up to the full amount you can. The maximum amounts you can contribute to retirement accounts before year-end are:
- IRAs – The contribution limit is $6K a year. However, if you are 50 or older, it’s $7K.
- 401(k)s – People under 50 years old can save up to $19K a year. If you’re 50 or older, you can contribute to your 401(k) an additional $6K—for a total of $25K annually.
If you are older than 70½ years, you likely have to take required minimum distributions (RMDs) from your retirement accounts—be very sure to do so before year-end. The penalty for failing to take RMDs is stiff: 50% on any amount that should have been, but was not distributed.5
Are you self-employed or the owner of a closely held business? You may want to set up a qualified plan to provide yourself (and perhaps your employees) with retirement benefits and tax-deferral opportunities.
Qualified plans must be established by year-end, but need not be funded until the due date for your tax filings (plus extensions).
If your employer allows you to defer your compensation, you must elect to defer your 2020 salary and bonuses by December 31, 2019. (Many employers set an earlier administrative deadline for making the election, so be sure to check your employer’s specific policy.)
Deferral means irrevocably selecting how and when you will receive the compensation. There is no income tax liability on either the compensation or its growth until you receive it, when the payment is taxed at your ordinary income rate at that time.
Remember, though, that your deferred compensation remains an unsecured liability that you are owed by your employer during the deferral period and that is subject to creditor claims against your employer.
We can help
These are just a few examples of the opportunities you may have before year-end to take care of your financial health for 2019. First, speak with your tax advisor regarding your tax situation. Then, meet with a J.P. Morgan Advisor about your investment strategy and consider what may be right for you, the more potential benefits you may be able to reap from your year-end planning.
The views and opinions expressed in this material are those of the featured J.P. Morgan Chase & Co. (“J.P. Morgan”) employee and do not necessarily reflect the policies or positions of JPMorgan Chase & Co. The material is provided for informational purposes only and is designed to provide general market commentary. It does not constitute J.P. Morgan research nor should it be considered a recommendation of a particular investment strategy or an offer or solicitation for the purchase or sale of any financial instrument. Opinions and estimates offered constitute the featured J.P. Morgan employee’s judgment as of the date of this material and are subject to change without notice as are statements of financial market trends, which are based on current market conditions. J.P. Morgan believes the information provided here is reliable, but do not warrant its accuracy or completeness. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation for any particular action.
Tax-aware strategies seek to reduce capital gains. There is no guarantee that they will eliminate them. The views and strategies described herein may not be suitable for all investors.
Depending upon the laws of the home state of the client or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 Plans may be available only if invested in the home state‘s 529 Plan. Any state-based benefit offered with respect to a particular 529 Plan should be one of many appropriately weighted factors to be considered in making an investment decision; and clients are advised to consult with their financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to their specific circumstances.
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