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2019 Year-End Tax and Financial Planning Checklist

With the New Year fast approaching, the opportunity to optimize your 2019 finances ahead of next year’s tax filing is upon us. Here are six areas where thoughtful tax, investment and financial planning can minimize what you’ll owe Uncle Sam in 2020.

CheckmarkKnow Your Breakpoints

The Tax Cuts and Jobs Acts of 2017 created a new set of tax brackets for 2019 ordinary income, ranging from 10% for single filers earning less than $9,700 to 37% for those earning more than $510,300. However, those aren’t the only tax brackets in the U.S. tax code – so pay attention to your filing status and make sure you’re using the right income ranges when estimating your tax brackets.

Income from the sale of an asset (like an investment) held less than one year is considered ordinary income and is taxed accordingly. However, income from the sale of an asset held longer than one year is taxed at a capital gains rate, and capital gains have their own breakpoints of 0%, 15% and 20%. Which bracket your capital gains income lands in depends on the amount of income (of course) but also such factors as marital status or if you’re the head of the household.

Your modified adjusted gross income determines your eligibility for a variety of tax benefits, ranging from deductions from contributions to your retirement account to certain income tax credits. Taxpayers whose 2019 MAGI exceeds $200,000 ($250,000 for couples) will be responsible for an additional 3.8% tax on the surplus.

The Kiddie Tax was designed to disincentivize parents from shifting investment income to their children to reduce their tax liability. As a result of the Tax Cuts and Jobs Act, a child’s unearned income after the first $2,200 is taxed at trust tax rates of 10%, 24%, 35% and 37% for 2019. The top capital gain tax rate of 20% applies once the child’s income exceeds $12,950. This tax applies to all children under age 18, or under age 24 for full-time students.

CheckmarkPlan for Capital Gains and Losses

While deciding when to sell a portfolio position should be more of an investment decision than a tax decision, understanding the tax implications of the sale might help drive its timing.

Look for opportunities to sell losing investments to offset gains from other sales. Because short-term gains (i.e., gains from assets held one year or less) are taxed at higher ordinary income rates, you’ll probably want to offset those first. If your total losses exceed your total gains for 2019, up to $3,000 of the difference can be used to offset other income. Losses in excess of $3,000 can be carried over to offset future gains.

Wash sale rules prevent investors from deducting a capital loss from the sale of a stock if they buy a “substantially identical” position during the 30 days before and after the sale (for a total of 61 days). Wash sale rules don’t apply to any sales for a gain, nor do they apply to gifts of appreciated stock to charity. They do apply when selling a security for a loss in a taxable account and then repurchasing it in a retirement account.

When mutual fund investors sell their fund shares, fund managers need to sell positions to generate cash. Given 2019’s significant market volatility, investors who sell their fund shares may force the fund to realize gains they otherwise would have avoided. That could result in larger capital gain distributions than expected.

CheckmarkWeigh the Standard Deduction Against Itemizing

Between the caps on some deductions, the elimination of others and the new larger standard deduction, the percentage of taxpayers who itemize fell from about 30% to 10% last year.

Many taxpayers choose to “bunch” their deductions, where they either accelerate or defer their deductible expenses to maximize their tax benefit. By moving deductible expenses from one year into another, taxpayers can itemize in one year and claim the standard deduction the next. The total out-of-pocket expense over the two-year period is the same, but the tax benefit of those expenses is maximized. Note that flexible deductions like charitable contributions tend to be better suited to this strategy than, for example, taxes and mortgage interest.

When it comes to when you pay state income and property taxes, it might be less about tax deductibility and more about cash flow management. The state tax deduction is now capped at $10,000, so any taxes paid above that amount are are non-deductible. Some states offer property tax incentives and late payment penalties, so be sure you understand how your state treats tax payments.

While the Tax Cuts and Jobs Act made it easier to deduct medical expenses in 2018, that tax break has now expired. For 2019, medical expenses are only deductible to the extent they exceed 10% of your adjusted gross income, regardless of age or filing status. To the extent that you can, grouping elective items (like dental or vision exams or prescription refills) in one year can help maximize their tax deductibility.

CheckmarkBe Mindful With Charitable Giving

In order to deduct a charitable gift this year, it must be considered a completed gift by December 31, 2019. To meet that deadline, a check must be mailed or a credit card charged by the end of the year.

Donating appreciated property rather than cash can be a great tax savings tool – they can generate a deduction for the full value of the property without triggering a taxable gain. But think twice before donating securities at a loss – the deduction would be limited to the market value at the time of the gift, and neither you nor your charity will receive a tax benefit. Instead, consider selling it first to realize the loss (which can be deducted) and then donate the proceeds to the charity.

If your income will be unusually large in 2019 (due to a sale of a business, for example, or exercising stock options), you may want to consider giving more this year for a larger tax benefit. With a donor-advised fund, you could realize the tax benefit this year without having to commit to a specific charity until later.

Charity-minded taxpayers who are subject to required minimum distribution rules may want to consider a qualified charitable distribution. A QCD is a distribution from an IRA that is transferred directly to a charity. While the donation isn’t deductible, the withdrawal from the IRA is not included as taxable income, making this a useful strategy if you’re claiming the standard deduction. The QCD can also minimize your AGI, which might allow you to qualify for other tax benefits or avoid higher Medicare premiums.

CheckmarkOptimize Contributions Toward Retirement

The contribution limits to most forms of retirement plans have increased from 2018.

Be sure to maximize contributions to your employer-sponsored retirement plan. While contributing to an employer plan does not prevent you from also contributing to an IRA, it might limit or even eliminate the potential tax deduction. Being over the threshold does not prevent you from making a non-deductible contribution so long your earned income equals or exceeds the contribution.

Taxpayers age 50 or older are usually eligible for a catch-up contribution – an additional contribution amount over the legal limit. The catch-up amounts for 2019 are $1,000 for IRAs, $6,000 for 401(k), 403(b) and 457 plans and $3,000 for SIMPLE IRAs.

If you have a traditional IRA, you might want to consider converting to a Roth IRA prior to year-end. While the conversion amount will be fully taxable, any future growth in the account can be withdrawn tax-free. Note that with the new tax laws, there’s no changing your mind – once you complete a conversion, you’re no longer able to recharacterize that conversion back to a traditional IRA.

CheckmarkDon’t Forget About Education Planning


If you’re planning on funding an education, you might want to look into a 529 plan. One advantage of gifting to a 529 plan is that you can make five years’ worth of gifts in one year. With the annual gift exclusion at $15,000 for 2019, that’s a potential $75,000 gift to a 529 plan – double that if the gift comes from a married couple. If you wait until early 2020, you’ll be able to contribute $15,000 to the 529 for 2019 and the 2020 – 2024 gifts next year.

As a result of the recent tax legislation, 529 plan assets can now be used to fund K–12 expenses. K–12 withdrawals are limited to $10,000 per beneficiary and can only be used for tuition costs, but they do provide taxpayers with some new flexibility.

Funding a Coverdell Education Savings Account can also provide tax-free income for education expenses. You can contribute up to $2,000 per year per beneficiary under 18 years old, and these accounts can be used to fund both college and K–12 expenses.

Ultimately, there are several factors that go into thoughtful financial planning, and your investment and planning decisions shouldn’t be driven entirely by taxes. That said, with a little forethought, you can make sound investment decisions that can also decrease your overall tax liability. Your Baird Financial Advisor, working in concert with your CPA or tax preparer, can review your options with you and make sure you’re not paying in more than you have to.