Allen Ostrofe: Have you checked off these 7 potential tax savings ideas before year-end?
Elizabeth and Mark recently called from Los Gatos, California, and had left a voicemail that had a tone of anxiety. The year had gone by so quickly they weren’t certain whether their year-end financial and tax planning was adequate. Elizabeth is self-employed as an independent contractor, and Mark is employed as a software engineer in Silicon Valley. Their earnings place them squarely in one of the higher tax brackets. They called wondering what tools are still available to use before December 31 of this year to save federal and/or state taxes. I suggested they consider the following seven ideas—some of these may apply to you, as well.
1. Charitable donations. Mark and Elizabeth need to focus more on available write-offs. They could check that they can still itemize under the new tax laws. Charitable non-profit organizations will gladly take their in-kind donations or cash before year-end. They need to make certain that they receive and retain detailed receipts, even photos, of goods they have donated. Make certain that the organization is a qualified 501(c)(3) non-profit. For larger items such as income-producing assets or parcels of land, they should consider a charitable remainder trust or a conservation easement with the aid of their Certified Financial Planner (CFP®) and estate planning attorney.
2. Quarterly estimates. Nothing is more frustrating than to have major financial surprises next March or April. Mark and Elizabeth should provide year-to-date income information to their tax preparer to confirm they are current with their quarterly estimated payments. In some cases, their remaining estimated payments (both federal and state) may be able to be reduced based upon this year’s updated income and expense information.
3. Retirement plan contributions. Mark, being an employee, should check with his CFP® to see whether he might qualify to max out his contributions to his 401(k), through salary deferrals, before year-end. For Elizabeth, being self-employed, it is not too late to establish a SEP IRA retirement plan. Both Mark and Elizabeth could potentially reduce their taxable income dollar-for-dollar with any contributions made before Dec. 31. Elizabeth can even make contributions to her SEP IRA up until they file their tax return. They should also check with their CFP® or tax preparer about whether they can additionally make a tax-deductible IRA contribution or even Roth IRA contribution.
4. Get your personal finances organized now. Now is the best time for Mark and Elizabeth to start collecting all of their tax-related paperwork such as income-to-date, expenses, and donations. They should make their tax preparer aware of any financial changes they have had in comparison to tax year 2018. If they are so inclined, they should create a spreadsheet to track tax-relevant data. This helps in avoiding giving their tax preparer “a box of paperwork” in March or April. The more streamlined they keep their paperwork, the lower their tax preparation fee will likely be.
5. Organize your business finances now. For Elizabeth, the business owner: she should consider using, or updating, a spreadsheet or software such as Quickbooks. Make your tax preparer aware of your year-to-date gross income, capital expenses, and equipment purchases, especially where there have been significant changes from the previous year. Have there been any changes in your business status, e.g., changing from sole proprietor to a corporation?
6. Check your tax withholdings. For Mark, who is an employee: he should check and report to their tax preparer all of his year-to-date federal and state tax withholdings to avoid potential unwanted surprises next March or April. This could potentially provide the tax preparer enough time to make changes in withholding prior to year-end.
7. Investment gains and losses. Working with their CFP®, Mark and Elizabeth can take advantage of any losses that are currently unrealized within their non-retirement plan investment accounts. Realized capital losses can be used to offset any capital gains as well as up to $3,000 of ordinary income. Reviewing expected year-end capital gains distributions from mutual funds and ETF’s is another important step for Mark and Elizabeth to pursue their goal of no unwanted tax surprises.
If you feel that the tax year 2019 has crept up on you too quickly, and you feel uncertain or frustrated, take heart! This is a great time of year, before the holidays, to get your financial life under control, and aim to save paying unnecessary taxes to boot!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Allen Ostrofe, MBA, CFP®, is President Emeritus of Ostrofe Financial Consultants, Inc., with clients in 32 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 420 Sierra College Drive, Suite 200, Grass Valley.
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