It’s the time of year when we’re thinking back to school, the start of cooler weather, leaves turning fall colors, the upcoming holiday season—and, dare we say, year-end tax planning? But now may be the best time to coordinate with your tax advisor to review plans and implement strategies to optimize tax efficiencies. Here we focus on some strategies that may help reduce this year’s taxes and enhance your wealth plans overall. 

Explore Tax-Loss Harvesting

The market volatility we’ve seen this year could mean you may have incurred more losses than last year. However, you may be able to use those losses to decrease your 2019 tax bill through tax-loss harvesting. 

Tax-loss harvesting generates capital losses by selling assets that are currently worth less than what you paid for them. These losses are then used to offset capital gains recognized during the year.

Your plan may be to repurchase the asset at some point, but if you recognize a loss you must wait at least 31 days to repurchase the same asset or the tax-loss will be disallowed.[1]

If your capital losses exceed your capital gains, you can use up to $3,000 of the excess loss to offset other income. Any remaining capital losses can be carried forward.[2] For example, if you sell an asset and recognize a $15,000 capital loss and have $10,000 of capital gains, you can claim zero gains for the year. You can then use $3,000 of your remaining $5,000 in capital losses to offset other income in 2019. The remaining $2,000 may be used to reduce taxable income in 2020. 

Revisit Deferred Compensation Arrangements

Before making 2020 elections regarding nonqualified deferred compensation arrangements, we believe it’s important to determine if deferring income is right for you and decide on the deferral timing. 

Deferred compensation plans allow highly compensated employees to defer a portion of their income to a future year. The idea is to lower income levels during high-earning years.

The income is paid out at a future date of your choice that is typically when overall income is less, as is your corresponding tax bracket. Additionally, during the deferral period the income may be invested in a selection of investments set by the plan provider and grow on a tax-deferred basis. If you leave your job, the plan typically returns the participant’s vested balance at that time.[3]

Under The Tax Cuts and Jobs Act (TCJA), most taxpayers are now in lower tax brackets, but the lower tax rates are scheduled to expire at the end of 2025. This means any income deferred to 2026 and beyond may be subject to higher tax rates. The decision whether to defer income, when to defer it to, and if election dates should be changed, if possible, is complex. It’s impossible to know what future tax rates may be, but it is possible to project what your income may be at the time the compensation is taken and how deferred compensation fits in with other available planning strategies. Deferred compensation elections for 2020 must be made by December 31, 2019.[4] However, many employers may require elections to be finalized earlier.

Double Check Withholding and Estimated Tax Payments

The IRS significantly reduced the withholding tables after the TCJA became law. As a result, the amount of federal tax withheld from your salary may be significantly less than in previous years. 

But this lower withholding may not be enough to satisfy your federal tax liability, meaning you may owe taxes and be subject to interest and penalties.

The IRS has published a simplified withholding estimator that can provide a rough estimate of overall withholding and income taxes for 2019. This calculator can be found at https://apps.irs.gov/app/tax-withholding-estimator.[5]

By updating your W-4, your employer can adjust the amount withheld from your salary to cover any shortfall, avoiding potential underpayment penalties. If you’re subject to taking required minimum distributions (RMDs) from a defined contribution plan, such as a 401(k) or individual retirement account (IRA), it may make sense to increase the amount of tax withheld from the RMD to cover any tax payment shortfall. Just as with salary withholding, taxes withheld from RMDs can reduce or negate interest and penalty fees. Further, if you make estimated tax payments, it might consider reviewing your payments now. This can help mitigate underpayment penalties or save you from paying too much in estimated taxes.

Maximize the Benefit of Charitable Contributions

Tax reform increased the standard deduction and suspended or limited several itemized deductions beginning this year. This means fewer people will benefit from itemizing deductions.

Taxpayers with itemized deductions greater than or close to the standard deduction may consider maximizing the benefit of their charitable contributions in 2019.

Here are some strategies to help accomplish this: 

Consider Cash

It may be more beneficial to gift cash. Cash contributions to public charities, such as churches, hospitals, and schools, are deductible up to 60% of adjusted gross income (AGI), while most contributions of appreciated securities are limited to 30% of AGI.[6] Factors such as your AGI, the amount you wish to contribute, and investment portfolio considerations should be weighed in consultation with your tax advisors.

Bunch Contributions

Making larger contributions less often could allow you to accumulate deductions and itemize. For example, if a married couple filing jointly contributes $15,000 per year to charity, assuming no other itemized deductions, they will not exceed the $24,000 standard deduction and will not receive a tax benefit for their contributions. However, if they contribute $30,000 every other year, they will be able to itemize in the year they make the charitable contribution and benefit from an additional $6,000 deduction that year.

Donor-advised funds (DAFs) can be an effective tool for bunching charitable contributions. You would be eligible to take an income tax deduction in the year the contribution is made, but there is no minimum required distribution that needs to be made in any given year. If this is an option for you, be sure to factor the cost of a DAF into your decision.

Individuals age 70 ½ and older may make qualified distributions from their IRAs directly to qualified charities up to $100,000 annually. These distributions are not taxable federal income for the donor and count toward the IRA’s RMD. Particularly for those who are no longer itemizing, a qualified charitable distributions may be an attractive option to satisfy charitable goals tax efficiently.

Look at Contributions to 529 Plans

529 plans can be an effective way to save for educational expenses.

The plan allows for distributions of up to $10,000 per year for elementary and secondary school tuition.

A unique feature of 529 plans is donors can front-load accounts with up to five years of annual exclusion gifts. This means that in 2019 you can contribute up to $75,000 ($150,000 for a married couple) to a 529 plan and still qualify for annual exclusion gift treatment.[7] 529 plans grow tax-free, and distributions for qualified educational expenses are tax free. Most states offer a state tax deduction for 529 contributions and follow federal tax rules for 529 distributions. Confer with a tax advisor who understands the laws of your state to determine how these rules will affect you. 

Consider Bunching Medical and Dental Expenses

This year medical and dental expenses are only deductible to the extent they exceed 10% of AGI.

If you itemize and have large or upcoming known medical or dental expenses, consider paying these expenses in 2019 to the extent it makes sense.

Moving major medical and dental expenses into one tax year increases the likelihood they will be deductible. Medical and dental expenses include payments for medical or dental care for you, your spouse, and your dependents. Qualified expenses include payments for doctors or dentists, prescription drugs, health insurance premiums, certain long-term care premiums,[8] and other costs, including health-related lodging and mileage. 

Conclusion 

As year-end approaches, our thoughts may turn to the holiday season, but it’s also an ideal time to review wealth plans and address your year-end tax planning to take advantage of potential tax benefits. It is equally important to reflect on what it is that’s most important to you so that your plans can help achieve your personal and financial goals.

This article includes items for you to consider with your tax, legal, and accounting advisors. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement.