It’s hard to believe we’re fast approaching the end of 2019, but it’s true. Here are four things to consider as you weigh potential tax moves between now and the end of the year.
1. Be smart about your charitable giving
If you’re already inclined to donate to charity, then consider donating appreciated securities rather than cash to your favorite charity or to a donor advised fund. Donors who can afford to put away more than $100,000 may want to consider starting a charitable lead trust (CLT). Charitable lead trusts are designed to provide income payments to at least one qualified charitable organization for a period measured by a fixed term of years, the lives of one or more individuals, or a combination of the two; after that, trust assets are paid to either the grantor or to one or more noncharitable beneficiaries named in the trust instrument.
2. Maximize retirement savings
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your taxable income. If you haven’t already contributed the maximum amount allowed, consider doing so by year-end. If you’re a business owner, consider opening a traditional 401(k) profit sharing plan. Better yet, pair it with a defined benefit or cash balance plan and you may be able to save even more, tax-free.
3. Take any required distributions
Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you’re still working for the employer sponsoring the plan). Make sure to take any distributions by the date required, which is the end of the year for most individuals. The penalty for not taking distributions in time is substantial: 50% of any amount that you failed to withdraw as required. If you’re fortunate enough not to need the money to live on, consider making a qualified charitable distribution (QCD) so your RMD is not added to your taxable income.
4. Weigh year-end investment moves
You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income or carried forward to reduce your taxes in future years.
There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who can evaluate your situation and help you determine if any year-end moves make sense for you. Your Azzad financial advisor is also available to help, so feel free to contact us.