Many of the smart tax moves for 2019 are familiar ones—such as contributing to tax-advantaged retirement plans and increasing or "bunching of deductions.
Accelerate Deductions and Defer Income
Deferring tax is a cornerstone of tax planning. Generally, this means accelerating deductions into the current year and deferring income into next year. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate charitable contributions, medical deductions and interest payments.
Contribute to Charity
Contributing to charitable causes before the end of the year is a tried-and-true tax-reduction strategy. But remember to get a receipt for every contribution you make, not just those over $250. Also, if you want to be more strategic, you could open a donor-advised fund, which offers several advantages for managing your charitable-giving activity. You could, for example, contribute a lump sum to the fund before December 31, take the entire deduction on your 2019 tax return, and then instruct the fund to use the money to make next year’s gifts.
One strategy that offers two tax benefits is donating appreciated securities, such as stocks or bonds, to charity. The tax code allows you to use the current market value of the asset as a deduction without having to pay tax on the capital appreciation, so you get the charitable contribution deduction and avoid capital gains tax.
Donate Your IRA Required Minimum Distribution to Charity
IRA Owners must be age 70 1/2 or older to make a tax-free charitable contribution. Those who meet the age requirement can transfer up to $100,000 per year directly from an IRA to an eligible charity without paying income tax on the transaction. If you file a joint tax return, your spouse can also make a charitable contribution of up to $100,000, meaning couples can exclude up to $200,000 of their retirement savings from income tax if they donate it to charity. If you donate more than the maximum allowable amount, it is considered income and could be subject to income tax. Qualified charitable contributions must be made by December 31 each year in order to exclude that amount from taxable income.
Charitable contributions can only be made from IRAs, not 401(k)s or similar types of retirement accounts. So you might need to roll funds over from a 401(k) to an IRA if you want to make tax-free charitable contributions part of your retirement plan. You don't need to itemize your taxes in order to make an IRA charitable distribution. However, you cannot additionally claim a charitable contribution tax deduction on a charitable distribution from your IRA. An IRA charitable contribution also satisfies the annual minimum distribution requirement for your IRA.
Leverage Retirement Account Tax Savings
It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or IRAs still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. Contributions to your 401(k) or 403(b) must be made by December 31, 2019, to impact your 2019 taxes, so you need to act quickly to increase your deferral. The 2019 401(k) contribution limit is $19,000 ($25,000 for people age 50 or older). With an IRA, you have until April 15, 2020, to make a 2019 tax-deductible contribution of up to $6,000 ($7,000 if you’re age 50 or older).
Use your Annual Gift Tax Exemption.
Every year, you can give up to a certain amount to anyone you want without having to deal with the gift tax at all. For 2019, that amount is $15,000.
With the annual exclusion provision, you're allowed to make multiple $15,000 gifts to as many different people as you want. For example, if you have three children and you want to max out your giving, then you could give a total of $45,000 without any gift tax consequences.
What if I go over $15,000?
The logical question to ask is what the consequences are if you end up giving somebody more than the annual exclusion amount. In that event, you'll end up having to file a gift tax return with the IRS. Form 709 is the form on which you'll report the amount of the taxable gift. So, for instance, if you gave someone $20,000, you'd report that amount, subtract out the $15,000 annual exclusion amount, and then have $5,000 left over.
However, that still doesn't mean that you'll actually have to pay any tax. The reason why is that on top of the annual exclusion amount, there's also a lifetime exemption from gift and estate tax that you're allowed to use. For 2019, the exemption is $11.4 million. Unlike the annual exclusion amount, the lifetime exemption applies to all the gifts you make, rather than on a per-person basis.
Taking the example above, say that you gave $20,000 in gifts to someone just after New Year's. You'd have a taxable gift of $5,000, and that would use up a small piece of your $11.4 million exemption. However, you'd still have $11.395 million left for future gifts during your lifetime or for money that you transferred to your heirs after your death.
The only time you actually pay any gift tax out of pocket is if you use up your entire lifetime exemption. That's very rare, and only a small fraction of Americans ever have to pay any gift tax.