Year-End Tax Planning – Strategies to Save

October 8, 2019

The Tax Cuts and Jobs Act of 2017 (TCJA) put into place new tax legislation for Americans, officially taking effect for the 2018 tax year.  The full effect of the changes was not felt by most individuals and families until they filed their returns in April of this year. If proactively planned for, below are several strategies that have proven to save significant taxes under the new tax law.

Minimize Taxable Income:

Limiting taxable income is not a new concept but often basic tax planning opportunities are overlooked. The two opportunities below are ‘use it or lose it’ and must be planned for before year-end:

  • Max your 401k/403b savings – The maximum contribution for 2019 went up to $19,000 plus an additional $6,000 if you are over 50. Ensure your deferrals have been adjusted to maximize your retirement plan savings.
  • Health Savings Account (HSA) – This is another pre-tax savings opportunity – up to $7,000 in 2019 (plus $1,000 catch-up if over 50). Savings in an HSA can be invested, grow tax-deferred, and best of all be withdrawn tax-free if used for qualified health expenses now or in retirement.

Maximizing the impact of Charitable Giving:

The new legislation drastically limited itemized deductions and increased the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly.  This means that many charitably inclined Americans may no longer be receiving the same tax benefit for their giving.

For those who are currently subject to Required Minimum Distributions (RMD), individuals over age 70.5 under current tax law, the best way to give to charity is often directly from your Individual Retirement Account (IRA).  Individuals currently taking RMDs are permitted to make a qualified charitable distribution to their charity of choice.  Doing so has the combined effect of satisfying a portion of your RMD and stopping the amount sent to charity from being included in your taxable income, giving you the benefit of a fully deductible gift.

For those not subject to required minimum distributions, you may want to explore giving to your favorite charities in larger amounts every other year or through a donor-advised fund in a strategy referred to as “Lumped Giving” as we have laid out in an example below:

In this case, a family that is strategic with the timing of their giving can increase the total deductions that they are able to claim by $20,000!

Roth IRA Planning:

Taxpayers that are comfortable pre-paying some tax in the current year can make Roth conversions in today’s lower rate environment, then pull these funds (and related investment earnings) out of the Roth IRA tax-free later when rates are set to climb back up.  There can also be a state income tax benefit to Roth IRA conversions.  Depending on an individual’s state of residence, IRA income may not be subject to state income tax. Several states, such as Illinois, do not currently levy taxes on Roth Conversions.

Under the current tax law in 2019, married couples with a taxable income of $321,450 stay completely within the 24% marginal income tax bracket.  When law reverts to old tax rates in 2026, that same couple will find themselves comfortably into the 33% marginal tax bracket – this could represent a tax savings of 9% on both principal and growth down the line!

If you have not already done so, please send a copy of your 2018 tax return to your BDF team, this can be done securely through your MyBDF web portal.  We would love the opportunity to review your returns for opportunities to discuss and implement these strategies and more before the end of the year.

Charlie Murin is a senior planner at BDF.  He sits on the firm’s Financial Planning Committee, which is responsible for educating the BDF team on financial planning topics and improving the team’s multifaceted planning process.  Charlie earned a Bachelor of Science from the University of Illinois, at Urbana-Champaign, in Agriculture and Consumer Economics with a concentration in Financial Planning.  He has his Series 65 license and is a CERTIFIED FINANCIAL PLANNER™ professional.