22 Smart Tax Moves to Make Before the End of the Year

As 2019 draws to a close, it's time to start getting organized and thinking about making last-minute tax moves to help decrease your overall tax burden come April. This year in particular there's much to take note of between changes ushered in by the Tax Cuts and Jobs Act and recent cost-of-living increases to contribution limits for 401(k) funds and other retirement vehicles. The key point to remember is that most tax deductions and credits are based on actions you take before Dec. 31. With the end of the year rapidly approaching, here are some of the money saving and housekeeping moves to consider.

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Donating to a charity not only helps a worthy cause, but it also provides a tax deduction for those who itemize. In fact, the ever-popular charitable contribution deduction has been enhanced for 2018 and thereafter, says Andrew Cohen, senior tax manager at the New York-based accounting firm Friedman LLP. "A taxpayer can now deduct cash donations up to 60% of adjusted gross income, which is up from 50% in 2017," Cohen explained, adding that the donations must have been made to a 501(c)(3) organization. For property donations, the deduction is limited to either 30% of your adjusted gross income when using fair market value of the property or 50% of your adjusted gross income if you're using cost basis to determine the amount of the deduction, Cohen said.

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The tax code still allows for preferential tax treatment on the sale of capital assets, says Cohen of Friedman LLP. "The maximum capital gains rate is currently 20% plus the 3.8% Net Investment Income Tax," Cohen explained. "Take advantage of these low rates now as there's a possibility that the capital gains rate may increase in the years to come." While the maximum capital gains rate is 20% as Cohen indicated, the rate for most taxpayers is typically even lower, at 15%. And there are some instances when capital gain may be taxed at 0% (if you're among those who fall into the 10% to 12% income tax brackets.) A 20% tax rate on net capital gains applies to those whose income exceeds the 37% ordinary tax bracket.

The Tax Cuts and Jobs Act created what's known as Qualified Opportunity Zones, a program allowing taxpayers to defer payment of capital gains tax until the 2026 tax year if such gains are invested in opportunity zones, Cohen said. The newly created zones are locations around the country, many of which were established in 2018, that would benefit from economic development and job creation. Those who invest in such communities may defer tax on eligible capital gains for only the portion of the gain used to benefit the economically distressed zone. The Qualified Opportunity Zone investment must be made within 180 days of the sale that generated gains. Opportunity zones exist in all 50 states as well as the District of Columbia and some U.S. territories.

Another approach to reducing your tax burden, if you're self-employed, is contributing to a SEP IRA before year's end. "The taxpayer can contribute up to a maximum of $56,000 in 2019," Cohen said. For individuals 50 and older, that amount increases to $62,000, he said. "The amount of the contribution to a SEP is a reduction to income, which has an effect of reducing the taxpayer's adjusted gross income dollar for dollar by the amount of the contribution," Cohen added.

One of the most popular and simplest ways to reduce your taxable income before year's end is to max out allowable 401(k) contributions. "Of course, this will provide a boost for your retirement, but as an added bonus, qualified contributions will lower your taxable income for the year," said Scott Butler, financial planner at Klauenberg Retirement Solutions in Laurel, Maryland. In late 2018, the IRS announced cost-of-living adjustments to the annual contribution limits. For 401(k), 403(b), and many 457 plans, as well as the federal government's Thrift Savings Plan, the annual contribution limit was shifted upward to $19,000 from $18,500.

Rather than waiting to find out from your accountant what your tax bill might be for this year, use the IRS's withholdings estimator to estimate how much you will owe or receive on your tax return, says Butler of Klauenberg Retirement Solutions. "The estimator will also give you a suggestion for your future withholdings," he said.

For those who are freelance or independent contractors, consider holding off on invoicing clients for work until December, suggests Logan Allec, a CPA and owner of the website Money Done Right. "If individuals delay any billing until December, they generally do not receive the income until January 2020," explained Allec. "This would keep that income off of their 2019 tax return." Thus, delaying paying taxes on the income for another year.

If capital gains from your investments are putting your gross income into a higher tax bracket, consider tax loss harvesting before the end of the tax year, says tax analyst Eileen Maki of FitSmallBusiness.com. An investment that will experience a net loss can be sold, resulting in a capital loss that offsets other capital gains during the same tax year.

If you don't contribute enough to charities in one calendar year to make it worthwhile to itemize on your tax return, consider making several years' worth of contributions all at once, suggests Allec of Money Done Right. By bunching charitable contributions into one year, your itemized deductions may be more likely to exceed the standard deduction, Allec explained. The standard deduction for married filing jointly is $24,400; for single taxpayers it's $12,200; and for heads of households it's $18,350.

Compiled by the Congressional Joint Committee on Taxation, the list of expiring tax provisions is fairly easy to interpret for non-tax professionals, says George Birrell, creator of Taxhub, a virtual tax prep platform. Birrell suggests reviewing the list regularly. "It can give you a lot of new ideas for future spending. It will also give you a chance to review some tax credits that you may have not taken in the past and may still be able to take," Birrell said.

Donating valuable stocks to charity provides two tax benefits in one, says Birrell of Taxhub. "You avoid the capital gains tax of the stock, and you get an itemized deduction for the appreciated value of the stock," Birrell explained. "Just remember that this is limited to 30% of your adjusted gross income."

If you have a qualified high deductible health plan, are not enrolled in Medicare, and are not claimed as a dependent on someone else's tax return, you may contribute up to $7,000 to a health savings account as part of a joint tax return ($3,500 for single filers) to lower your taxable income, says Ben Watson, a CPA and the CFO of DollarSprout. The money you put into a health savings account can be used in 2019 or saved for retirement. The key takeaway is that no matter when you use it, the contributions are tax-deductible, meaning they will reduce your federal income taxes owed.

For those who are self-employed, it's a good idea to sit down and review your business income before year-end. "Subtract your deductible expenses from your total income to find your taxable net income, and then do a projection for the final months of the year to come up with a rough idea of what you might end up owing or receiving as a refund," says Dave Du Val, chief customer advocacy officer for TaxAudit. "If it looks like you're going to owe, you can start making estimated payments now — or make higher estimated payments to make up the difference if you're currently making estimated payments."

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If you're retired, take a careful look at your financial needs for the rest of the year. Then, withdraw only what you need from retirement accounts to keep your tax bracket as low as possible and minimize the amount you'll owe in taxes, says Du Val of TaxAudit. "Retirement plan funds that are distributed from tax-deferred accounts, such as traditional IRAs and traditional 401(k) plans are taxed at ordinary income tax rates and the tax bracket you're in depends on all of your taxable income for the year," said Du Val. "This is why it makes sense to take only what you need, so that your distributions don't push you up into a higher tax bracket."

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Did you pay for any college or school expenses? There may be some credits available to you. The IRS provides tax credits for qualified education expenses incurred by you, your spouse or a dependent. There are two types of tax credits available — the American Opportunity Tax Credit (for students during the first four years of higher education) and the Lifetime Learning Credit, which applies to undergraduate, graduate and professional degree courses and related expenses. Be sure to keep receipts and be on the look-out for a 1098-T form from the educational institution, says Du Val, of TaxAudit. "You'll need this to do your taxes when the time comes, as well as receipts for required supplies and equipment," Du Val said.

If you have the free cash available, make an extra mortgage payment before the end of 2019. For instance, by making the mortgage payment that's due on Jan. 1, before the end of December, you can include the interest payment as part of your itemized deductions for 2019's tax returns, says Watson of DollarSprout. "If you wait until the new year to pay the January payment, it will be included in next year's deductions," explained Watson. "This is essentially borrowing a future deduction and using it this year, but could be helpful if you're right on the line of qualifying for other tax breaks by staying under a certain taxable income."

Want to be more environmentally conscious and score a tax break in the process? Consider installing solar panels on your property before 2019 wraps up. Those who do so may be eligible for a tax credit, says Tax Analyst, Eileen Maki of FitSmallBusiness.com. "The Energy Policy Act of 2005 allows eligible consumers, both residential and commercial, to earn a tax credit of up to 30% of the cost you paid to have solar panels installed on your property," Maki said. Known as the Investment Tax Credit (ITC), the measure was an incentive provided by the government to help trigger installation of solar systems nationwide. Unfortunately, the 30% rate is set to drop in 2020 and be phased out completely by 2022 for residential customers. Review the information on the IRS website to see if you quality.

Taxpayers who are 70½ and older should review the Required Minimum Distributions (RMDs) associated with their retirement accounts to avoid steep tax penalties, says Du Val of TaxAudit. That penalty can be as much as 50% for those who fail to take required distributions, which are the minimum amount the IRS requires individuals to withdraw from retirement funds in a calendar year. Some of the accounts covered by this rule include IRAs, SEP IRAs, and SIMPLE IRAs. Roth IRAs do not require such withdrawals until after the owner of the account has passed away.

If you obtain health insurance through a state or federal marketplace, you may be receiving the advance premium tax credit (APTC). The amount of that credit is based on the income estimates you made when signing up, explained Nathan Rigney, principal tax research analyst at The Tax Institute at H&R Block. If your income has changed throughout the year, the amount of the credit you qualify for may no longer be accurate, explained Rigney. "To avoid having to repay the advance credit, notify the marketplace of any changes to their household or income," Rigney said.

Who doesn't love a bonus at year's end? But if that extra money bumps you into a higher tax bracket, the bonus may not be so wonderful after all. To avoid this happening, find out if it is possible to defer receiving the bonus until January 2020. "If an employer awards an employee a large bonus before the end of the year, it's common for the employee to request that the bonus not be paid out until January of the next year," said Birrell of Taxhub. "Doing this will essentially defer the taxes due on this bonus for a whole year." This particular approach is useful for those who might see their income decline somewhat in the year ahead.

Have you paid a ton of out of pocket medical expenses this year? The good news is that the IRS allows taxpayers to deduct qualified unreimbursed medical expenses in excess of 10% of their adjusted gross income, Birrell said Birrell. Taxpayers may want to try and bundle medical expenses into one year by prepaying some expenses in order to maximize the benefit of this tax code provision, he said.

If you're a small business owner, consider ditching worthless equipment or property rather than selling it for a nominal loss. The benefit is that the IRS allows for taking an ordinary loss on your annual return rather than a capital loss, said Birrell of Taxhub. "Ordinary losses are losses from activities that the taxpayer actively engages in such as starting a business versus capital losses, which are generated from passive investments such as purchasing land hoping it will increase in value," Birrell explained. "From a tax perspective, ordinary losses are always preferred because they can be used to offset ordinary income, which is taxed at much higher rates. Capital losses can only be used to offset capital gains, which are taxed at a max rate of 20%."