Tax Planning Before the Holidays
As the days get cooler and shorter, October is also a time when many people consider tax planning before the holidays and the end of the year. With 2018 being the first year under the sweeping changes made under the of the Tax Cut and Jobs Act of 2017, there were some lessons learned and some positive steps that you may be able to take for this tax year.
One thing that caught many people off-guard last year was the withholding tables under the new Trump Tax Law, and we found that people were generally under-withholding. So, while people may have been used to getting a certain amount back as a refund, they received less last year. However, this wasn’t because taxes increased – overall, they decreased for most people, but because the IRS over-compensated for the new tax law it therefore may have felt as though you had a higher tax liability. This year, make sure you double check. To help with this, the IRS has developed an online tool called the “Tax Withholding Estimator” to help you withhold the right amount, and you can find it on the IRS website, IRS.gov.
It’s also a good time to check and make sure you’re fully funding retirement plans, Health Savings Accounts, and Flexible Spending Accounts, and to make sure you’re maximizing your tax deferred accounts. For example, you may have started the year at a relatively low deferral amount for your HSA, but had additional medical expenses come up, or you may have some coming before the end of the year. There’s still enough time left in the year to adjust your withholding accordingly to maximize your tax savings.
Another thing to keep in mind is the new, higher standard deduction under the new Trump Tax Law. Under this new law, there are much higher standard deductions in place: $12,200 for single individuals, and $24,400 for married filing jointly for tax year 2019. Since it may be harder to reach this limit now, you may want to consider bunching deductions into a single tax year in order to maximize the tax benefit. Deductions may include a gift to charity, medical expenses, or even pre-paying your state and local income taxes (SALT). But, remember when it comes to SALT taxes, the new tax law limits you to no more than $10,000.
If you are considering a gift to your favorite charity, remember that Qualified Charitable Distributions (QCDs) can save you tax. This is essentially a mechanism that allows you to direct your Required Minimum Distributions, (RMDs) directly to a charity of your choice. QCDs have the benefit of simplifying the process for you and for the charity, and they also provide you with a significant tax benefit. Another option you may consider for charitable giving is making a gift of appreciated securities. This helps minimize your tax burden by allowing you to avoid capital gains taxes on those securities.
Finally, this is an ideal time of year to consider loss harvesting as well. With the volatility we’ve experienced in the last year, and will likely continue to experience through next year’s election, it’s important to periodically review your portfolio and sell those securities that have experienced a loss. This is a great way to offset taxes on both gains and income. Ideally, you’d replace that with a similar security, to maintain an optimal allocation and keep your risk level appropriate.
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Case studies are intended to illustrate the types of financial issues faced by actual clients. They should not be construed as a testimonial for or endorsement of Lineweaver Wealth Advisors. They do not represent the experience of any advisory client. Each client’s situation is different, and their goals may not always be achieved. Lineweaver Wealth Advisors, LLC, is not engaged in the practice of law or accounting. Tax information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time.
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