The 2019 calendar year is rapidly approaching its conclusion, and with less than four weeks remaining in 2019 federal employees and annuitants are encouraged to make some end-of-year tax moves to save on their 2019 taxes. It is year two following the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), and many Americans are still confused about how TCJA affects their federal tax liabilities. This column makes suggestions to reduce 2019 tax bills and to avoid any unnecessary penalties for insufficient federal income withheld from one’s salary and annuity checks during 2019.
9. Check one’s federal income tax withholding.
As a result of TCJA, many employees and annuitants received less than they expected in refunds when they filed their 2018 federal income tax returns. Other employees and annuitants owed more than they expected when they filed their 2018 returns. The IRS earlier this year updated its W4 withholding calculator to make the calculator more “user-friendly” and precise, with the intention for individuals to establish the optimum federal income tax withholding amount for the rest of the calendar year, 2019. Those employees and annuitants who are not able to request additional withholding amounts this month and know for a fact that they may owe more than $1,000 when they file their 2019 taxes should consider making a federal estimated income tax payment that is due Jan. 15, 2020.
8. Itemize or take the standard deduction?
As a result of the TCJA, more than 25 million individuals have switched from itemizing to taking the standard deduction on their federal income tax returns. For 2019, the standard deduction is $12,200 for single filers and $24,400 for married couples filing jointly. Perhaps the most common allowable deductions included among itemized deductions are for state and local income taxes (SALT), real estate and personal property taxes, mortgage interest and charitable contributions. Under TCJA, SALT, real estate and personal property taxes are limited to $10,000, whether an individual files as single or married filing jointly. This means that a married couple who deducts the limit of $10,000 of SALT needs more than $14,400 of other deductions in order to make it worthwhile for the couple to itemize. The $14,400 includes mortgage interest and charitable contributions in order to benefit from itemizing. A single filer needs only $2,200 in order to make itemizing worthwhile since the SALT limitation is $10,000 and the standard deduction for singles is $12,200.
7. Evaluate capital gains and losses.
Individuals who own stocks, bonds, mutual funds and/or exchange-traded funds held in non-retirement accounts should check their investment positions. Individual investors can use realized capital losses to offset realized capital gains, plus $3,000 to offset ordinary income such as wages. Unused losses are carried forward for use in future tax years. It sometimes makes sense to sell an “underwater” investment at a loss before December 31st or to take capital gains if there are realized losses.
Individuals should also beware that increases in investment income could trigger the 3.8 percent surtax on investment income. The 3.8 percent surtax takes effect at $250,000 of adjusted gross income (AGI) for married couples filing jointly and at $200,000 for most single filers.
6. Beware of cryptocurrency.
Starting earlier this year, the IRS has been cracking down on cryptocurrency tax compliance. Tax preparers should be aware of the IRS cryptocurrency policy when preparing client 2019 returns. Affected individuals should take capital gains to use up losses to offset gains. Calculating these losses and gains when it comes to cryptocurrency can be challenging, and affected individuals should contact tax professionals who have the software and expertise with respect to how to calculate the taxes associated with cryptocurrency transactions.
5. If possible, contribute to the traditional TSP.
Most employees have one or two pay dates remaining in December 2019. The TSP contribution limit for 2019 is $19,000, with an additional $6,000 in “catch-up” contributions for employees over age 49 as of 12/31/2019. Traditional TSP contributions are deducted from an employee’s gross salary before federal (and in most states) before state income taxes, resulting in current year federal and state income tax savings.
4. Make 529 college savings contributions.
While there is no federal income tax deduction for contributions to 529 college savings plans, there are some states (like Maryland) that allow a deduction for state residents who contribute to their 529 plans. Contributions to these accounts can grow tax-free, and withdrawals used to pay eligible college expenses are tax-free. Contributions to 529 savings plans for 2019 must be made in most states by Dec. 31, 2019.
3. Beware of the so-called “kiddie” tax.
The “kiddie” tax is a tax that is imposed on the investment (unearned) income – this includes interest, dividend and capital gains income – of individuals as old as age 23, above an exemption (currently set at $2,200). TCJA changed the “kiddie” tax rules so that children of lower-and middle-income families usually pay more tax than under pre-TCJA tax rules. Planning for the new “kiddie” tax rules is therefore important. For example, grandparents may want to gift or give shares of stocks paying dividends to their children rather than to their grandchildren in order for their children to pay tax on the stock dividends rather than the grandchildren who are subject to the “kiddie tax” rules.
2. For employees and retirees over age 70.5, take required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs before Dec. 31, 2019.
Those employees and annuitants who are age 70.5 or older during 2019 must take their RMDs from their qualified retirement plans (for example 401(k) plans) and traditional IRAs before Dec. 31, 2019. Although an individual who becomes age 70.5 during 2019 has until April 1, 2020, to take his or her first RMD, the individual is strongly encouraged to take the first RMD before Dec. 31, 2019. In so doing, the individual will avoid having to take two RMDs during 2020 – one for 2019 and one for 2020 – and perhaps moving to a higher tax bracket as a result of the additional income.
The TSP also has RMDs but not for employees over age 70 who continue working in federal service.
1. Consider strategizing charitable giving including qualified charitable donations for employees and annuitants over age 70.5 with traditional IRAs.
Under TCJA, the standard deduction for both single and married filing jointly filers doubled. This means that fewer individuals will itemize on their federal income taxes, especially since state and local income taxes and real estate taxes are limited to $10,000 per filer. One way around the fact that the standard deduction exceeds the total of itemized deductions (which includes charitable contributions) is to combine charitable gifts of several year’s donations into one larger amount every few years. Together with other allowed deductions on Schedule A such as mortgage interest, medical expenses that exceed 10 percent of one’s adjusted gross income, is larger than the standard deduction amount. A strategy to increase one’s charitable donation amount is to donate appreciated investments held in taxable accounts, such as stock shares. The donor is entitled to an immediate donation tax deduction for the full market value within certain limits.
Employees and annuitants over age 70.5 with traditional IRAs have another good option to avoid the RMD and the additional income: They can write a check from their IRAs directly to a charity and the amounts given to the charity (up to $100,000) will count towards their annual IRA RMD. These donations via an IRA are called qualified charitable donations (QCDs). While QCDs cannot be included as part of an individual’s charitable gift donation for tax purposes, QCDs are not included in the donor’s annual income. Among other benefits, QCDs will lower an annuitant’s modified adjusted gross income (MAGI), used to determine among other things the annuitant’s Medicare Part B monthly premium.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.